SenesTech, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. SENESTECH, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Balance Sheets as of December 31, 2020 and 2019 F-3 Statements of Operations and Comprehensive Loss for the years ended December 31, 2020 and 2019 F-4 Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2020 and 2019 F-5 Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-6 Notes to Financial Statements F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of SenesTech, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of SenesTech, Inc. (the Company) as of December 31, 2020 and 2019, and the related statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. As discussed in Note 9 and 10 to the financial statements, the Company had complex equity transactions due to a warrant inducement and ratchet provisions related to the execution of a warrant transaction. Auditing management’s evaluation of these transactions can be complex due to the unusual nature of these transactions. To evaluate the appropriateness of the equity transactions, we examined and evaluated the financial information that was the initial cause along with management’s evaluations and management’s disclosure on the equity transactions. As discussed in Note 2 to the financial statements, the Company evaluated inventory for potential allowance. Auditing management’s evaluation of the inventory can be a significant judgment given the fact that the Company uses management estimates in evaluating the ability to recuperate the costs involved in acquiring these assets. To evaluate the appropriateness of the inventory allowance, we examined and evaluate the financial information that was the initial cost along with management’s plans, management’s evaluation for reserve and management’s disclosure on inventory. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company suffered a net loss from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ M&K CPAS, PLLC We have served as the Company’s auditor since 2017. Houston, TX March 29, 2021 F- 2 SENESTECH, INC. CONDENSED BALANCE SHEETS (In thousands, except shares and per share data) December 31, December 31, 2020 2019 ASSETS Current assets: Cash $ 3,643 $ 1,936 Accounts receivable trade, net 25 26 Accounts receivable-other - 123 Prepaid expenses 178 257 Inventory 945 1,180 Deposits 28 20 Total current assets 4,819 3,542 Right to use asset-operating leases 665 699 Property and equipment, net 538 738 Total assets $ 6,022 $ 4,979 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Short-term debt $ 98 $ 123 Accounts payable 404 265 Accrued expenses 292 1,193 Total current liabilities 794 1,581 Long-term debt, net 673 137 Operating lease liability 671 694 Total liabilities 2,138 2,412 Commitments and contingencies (See note 12) - - Stockholders’ equity: Common stock, $0.001 par value, 100,000,000 shares authorized, 5,099,512 and 1,414,671 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively 5 1 Additional paid-in capital 108,119 98,433 Accumulated deficit (104,240 ) (95,867 ) Total stockholders’ equity 3,884 2,567 Total liabilities and stockholders’ equity $ 6,022 $ 4,979 The accompanying notes are an integral part of these financial statements. F- 3 SENESTECH, INC. CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except shares and per share data) For the Years Ended December 31, 2020 2019 Grant revenue $ 24 $ - Sales 258 143 Cost of sales 281 101 Gross profit 1 42 Operating expenses: Research and development 1,494 1,908 Selling, general and administrative 6,440 8,421 Total operating expenses 7,934 10,329 Net operating loss (7,933 ) (10,287 ) Other income (expense): Interest income 3 45 Interest expense (28 ) (42 ) Other income (expense) 21 266 Total other income (expense) (4 ) 269 Net loss and comprehensive loss (7,937 ) (10,018 ) Warrant revaluation - 11 Deemed dividend-warrant price protection-revaluation adjustment 436 - Net loss attributable to common shareholders $ (8,373 ) $ (10,029 ) Weighted average common shares outstanding - basic and fully diluted 3,006,475 1,304,045 Net loss per common share - basic and fully diluted $ (2.78 ) $ (7.69 ) The accompanying notes are an integral part of these financial statements. F- 4 SENESTECH, INC. STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands, except shares and per share data) For The Years Ended December 31, 2019 and 2020 Additional Total Common Stock Paid-In Accumulated Stockholders’ Shares Amount Capital Deficit Equity (Deficit) Balance, December 31, 2018 1,173,854 $ 1 $ 92,151 $ (85,838 ) $ 6,314 Issuance of common stock, sold for cash, net 151,838 - 3,631 - 3,631 Issuance of common stock for services 7,203 - 34 - 34 Stock-based compensation - - 873 - 873 Issuance of common stock upon exercise of warrants 80,511 - 1,788 - 1,788 Issuance of common stock upon exercise of stock options 1,265 - - - - Payments for employee withholding taxes related to share-based awards - - (55 ) - (55 ) Warrant revaluation - - 11 - 11 Net loss for the year ended December 31, 2019 - - - (10,029 ) (10,029 ) Balance, December 31, 2019 1,414,671 $ 1 $ 98,433 $ (95,867 ) $ 2,567 Issuance of common stock for services 4,543 - - - - Stock-based compensation - - 645 - 645 Issuance of common stock upon cashless exercise of warrants 51,414 - 238 - 238 Issuance of common stock upon exercise of warrants, net 1,700,680 2 2,628 - 2,630 Issuance of common stock, sold for cash, net 1,928,180 2 5,739 - 5,741 Warrant antidilution price protection adjustment - - 436 - 436 Issuance of common stock for fractional shares-20-1 reverse split 24 - - - - Net loss for the year ended December 31, 2020 - - - (8,373 ) (8,373 ) Balance, December 31, 2020 5,099,512 $ 5 $ 108,119 $ (104,240 ) $ 3,884 The accompanying notes are an integral part of these financial statements. F- 5 SENESTECH, INC. CONDENSED STATEMENTS OF CASH FLOWS (In thousands) For the Years Ended December 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (7,937 ) $ (10,018 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 288 413 Stock-based compensation 645 873 Bad debt expense - 123 (Gain) loss on sale of equipment (21 ) 3 (Increase) decrease in current assets: Accounts receivable - trade 1 (10 ) Accounts receivable - other 123 (123 ) Other assets 11 (5 ) Prepaid expenses 79 85 Inventory 235 81 Deposits (8 ) (11 ) Increase (decrease) in current liabilities: Accounts payable 139 92 Accrued expenses (663 ) 455 Deferred rent - (16 ) Net cash used in operating activities (7,108 ) (8,058 ) CASH FLOWS FROM INVESTING ACTIVITIES Cash received on sale of property and equipment 47 - Purchase of property and equipment (114 ) (71 ) Net cash used in investing activities (67 ) (71 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of common stock, net 5,741 3,631 Proceeds from the issuance of notes payable-Payroll Protection Program 646 - Repayments of notes payable (73 ) (220 ) Repayments of finance lease obligations (62 ) - Proceeds from the exercise of warrants 2,630 1,789 Payment of employee withholding taxes relating to share-based awards - (55 ) Net cash provided by financing activities 8,882 5,145 NET CHANGE IN CASH 1,707 (2,984 ) CASH AT BEGINNING OF PERIOD 1,936 4,920 CASH AT END OF PERIOD $ 3,643 $ 1,936 SUPPLEMENTAL INFORMATION: Interest paid $ 28 $ 42 Income taxes paid $ - $ - NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock warrant revaluation $ - $ 11 Forgiveness of accrual in warrant exercise $ 238 $ - Deemed dividend $ 436 $ - Common stock issued on accrued bonus $ - $ 33 The accompanying notes are an integral part of these financial statements. F- 6 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 1. Organization and Description of Business SenesTech, Inc. (referred to in this report as “SenesTech,” the “Company,” “we” or “us”) was formed in July 2004 and incorporated in the state of Nevada. The Company subsequently reincorporated in the state of Delaware in November 2015. Our corporate headquarters is in Phoenix, Arizona. We have developed and are commercializing a global, proprietary technology for managing animal pest populations, initially rat populations, through fertility control. Although there are myriad tools available to control rat populations, most rely on some form of lethal method to achieve effectiveness. Each of these solutions is inherently limited by rat species’ resilience and survival mechanisms as well as their extraordinary rate of reproduction. ContraPest®, our initial product, is unique in the pest control industry in attacking the reproductive systems of both male and female rats, which our field data shows will result in a sustained reduction of the rat population. Rats have plagued humanity throughout history. They pose significant threats to the health and food security of many communities. In addition, rodents cause significant product loss and damage through consumption and contamination. Rats also cause significant damage to critical infrastructure by burrowing beneath foundations and gnawing on electrical wiring, insulation, fire proofing systems, electronics and computer equipment. The most prevalent solution to rat infestations is the use of increasingly powerful rodenticides. Although these solutions provide short term results, there are growing concerns about secondary exposure and bioaccumulation of rodenticides in the environment, as well as concerns about rodenticides that have no antidotes. The pest management industry and Pest Management Professionals (“PMPs”) are being asked for new solutions that are both effective and less toxic. Our goal is to provide customers with not only a solution to combat their most difficult rat problems, but also offer a non-lethal option to serve customers that are looking to decrease or remove the amount of rodenticide used in their pest control programs. ContraPest is a liquid bait containing the active ingredients 4-vinylcyclohexene diepoxide (“VCD”) and triptolide. ContraPest limits reproduction of male and female rats beginning with the first breeding cycle following consumption. ContraPest is being marketed for use in controlling Norway and roof rat populations. SenesTech began the registration process with the United States Environmental Protection Agency (the “EPA”) for ContraPest on August 23, 2015. On August 2, 2016, the EPA granted an unconditional registration for ContraPest as a Restricted Use Product (“RUP”), due to the need for applicator expertise for deployment. On October 18, 2018, the EPA approved the removal of the RUP designation. We believe ContraPest is the first and only non-lethal, fertility control product approved by the EPA for the management of rodent populations. In addition to the EPA registration of ContraPest in the United States, ContraPest must obtain registration from the various state regulatory agencies prior to selling in each state. We have received registration for ContraPest in all 50 states and the District of Columbia, 47 of which have approved the removal of the RUP designation. We expect to continue to pursue regulatory approvals and amendments to the existing U.S. registration for ContraPest, and if ContraPest begins to generate sufficient revenue, regulatory approvals for additional jurisdictions beyond the United States. In certain cases, our EPA and state registrations require completion of testing and certifications even though we have received approval for the product or its labelling. We continue to seek to comply with these requirements. The Company also continues to research and develop enhancements to ContraPest that align with our target verticals and other potential fertility control options for additional species. Reverse Stock Split On February 4, 2020, we amended our amended and restated certificate of incorporation to effect a 1-for-20 reverse split of our issued and outstanding shares of our common stock. The accompanying condensed financial statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding common stock, options and warrants exercisable for common stock, restricted stock units, preferred stock conversions to common stock and per share amounts contained in our condensed financial statements have been retrospectively adjusted. F- 7 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 1. Organization and Description of Business – (continued) Going Concern Although our audited financial statements for the year ended December 31, 2020 were prepared under the assumption that we would continue our operations as a going concern, the report of our independent registered public accounting firm that accompanies our financial statements for the year ended December 31, 2020 contains a going concern qualification in which such firm expressed substantial doubt about our ability to continue as a going concern, based on the financial statements at that time. Specifically, as noted above, we have incurred operating losses since our inception, and we expect to continue to incur significant expenses and operating losses for the foreseeable future. These prior losses and expected future losses have had, and will continue to have, an adverse effect on our financial condition. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in us. Need for Additional Capital Since our inception, we have sustained significant operating losses in the course of our research and development and commercialization activities and expect such losses to continue for the near future. We have generated limited revenue to date from product sales, research grants and licensing fees received under our former license agreement with Neogen. In 2017, we began to prepare and launch commercialization of our first product, ContraPest. We have primarily funded our operations to date through the sale of equity securities, including convertible preferred stock, common stock and warrants to purchase common stock. See Note 9 for a description of our public equity sales. We have also raised capital through debt financing, consisting primarily of convertible notes and government loan programs, and, to a lesser extent, payments received in connection with product sales, research grants and licensing fees. Through December 31, 2020, we had received net proceeds of $75.7 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other promissory notes, an aggregate of $1.7 million from licensing fees and an aggregate of $0.9 million in net product sales. At December 31, 2020, we had an accumulated deficit of $104.2 million and cash and cash equivalents of $3.6 million. As discussed in Note 8 - Borrowings, of our Notes to Condensed Financial Statements, on April 15, 2020, the Company also received cash proceeds of $645,700 from the Paycheck Protection Program (or “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act. We are using the proceeds from the PPP Loan to retain employees, maintain payroll and make lease, interest and utility payments. In addition, as described in Note 14 - Subsequent Events, we entered into a security private placement agreement on February 2, 2021, which resulted in gross proceeds to the Company of approximately $10.00 million, before deducting fees payable to the placement agent and other estimated offering expenses payable by us. Our ultimate success depends upon the outcome of a combination of factors, including: (i) successful commercialization of ContraPest and maintaining and obtaining regulatory approval of our products and product candidates; (ii) market acceptance, commercial viability and profitability of ContraPest and other products; (iii) the ability to market our products and establish an effective sales force and marketing infrastructure to generate significant revenue; (iv) the success of our research and development; (v) the ability to retain and attract key personnel to develop, operate and grow our business; and (vi) our ability to meet our working capital needs. Based upon our current operating plan, we expect that cash and cash equivalents at December 31, 2020, in combination with the security private placement on February 2, 2021, anticipated revenue and any additional sales of our equity securities, will be sufficient to fund our current operations for at least the next 12 months. We have taken and will continue to take actions to reduce our operating expenses and to concentrate our resources toward the successful commercialization of ContraPest in the United States. However, if anticipated revenue targets and margin targets are not achieved or expenses are more than we have budgeted, we may need to raise additional financing before that time. If we need more financing and we are unable to raise necessary capital through the sale of our securities, we may be required to take other measures that could impair our ability to be successful and operate as a going concern. In any event, we may require additional capital in order to fund our operating losses and research and development activities before we become profitable and may opportunistically raise capital. We may never achieve profitability or generate positive cash flows, and unless and until we do, we will continue to need to raise capital through equity or debt financing. If such equity or debt financing is not available at adequate levels or on acceptable terms, we may need to delay, limit or terminate commercialization and development efforts or discontinue operations. Major Customer The Company one major customer that accounted for approximately 15% and $44 of sales for the year ended December 31, 2020 and two customers that accounted for approximately 12% and 20% and $17 and $28 of sales for the year ended December 31, 2019. The Company expects to maintain these relationships with these customers. F- 8 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classification of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The significant estimates in the Company’s financial statements include the valuation of preferred stock, if issued, common stock and related warrants, and other stock-based awards. Actual results could differ from such estimates. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on net earnings, financial position or cash flows. Cash and Cash Equivalents The Company considers money market fund investments to be cash equivalents. The Company had cash equivalents in the form of money market fund investment of $1,500 and $1,766 at December 31, 2020 and December 31, 2019, respectively, included in cash as reported. Accounts Receivable-Trade Accounts receivable-trade consist primarily of receivables from customers. The Company provides an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer’s trade accounts receivable. The allowance for doubtful trade receivables was $0 and less than $123 at December 31, 2020 and at December 31, 2019, respectively. Accounts Receivable-Other Accounts receivable-other at December 31, 2019 consist primarily of receivables related to insurance reimbursements due the Company. Inventories Inventories are stated at the lower of cost or market value, using the first-in, first-out convention. Inventories consist of raw materials, work in progress and finished goods. Raw materials are stocked to reduce the risk of impact on manufacturing for potential supply interruptions due to the COVID-19 pandemic or long lead times on certain ingredients. Reserves for obsolete inventory consist of reserves primarily related to obsolete product containers and delivery systems. Components of inventory are: December 31, 2020 2019 Raw materials $ 950 $ 1,035 Work in progress 24 - Finished goods 94 149 Total inventory 1,068 1,184 Less: Reserve for obsolete (123 ) (4 ) Total net inventory $ 945 $ 1,180 F- 9 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 2. Summary of Significant Accounting Policies – (continued) Prepaid Expenses Prepaid expenses consist primarily of payments made for director and officer insurance, director compensation, rent, legal and inventory purchase deposits and seminar fees to be expensed in the current year. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Equipment held under finance leases are stated at the present value of minimum lease payments less accumulated amortization. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. The cost of leasehold improvements is amortized over the life of the improvement or the term of the lease, whichever is shorter. Equipment held under finance leases are amortized over the shorter of the lease term or estimated useful life of the asset. The Company incurs maintenance costs on its major equipment. Repair and maintenance costs are expensed as incurred. Impairment of Long-Lived Assets Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require long-lived assets or asset groups to be tested for possible impairment, the Company compares the undiscounted cash flows expected to be generated from the use of the asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques, such as discounted cash flow models and the use of third- party independent appraisals. The Company has not recorded an impairment of long-lived assets since its inception. Revenue Recognition Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers (“ASC 606”) . Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies 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. The Company recognizes revenue when product is shipped at a fixed selling price on payment terms of 30 to 120 days from invoicing. The Company recognizes other revenue earned from pilot studies, consulting and implementation services upon the performance of specific services under the respective service contract. The Company derives revenue primarily from commercial sales of products, net of discounts and promotions, as well as consulting and implementation services provided in conjunction with our product deployments. Research and Development Research and development costs are expensed as incurred. Research and development expenses primarily consist of salaries and benefits for research and development employees, stock-based compensation, consulting fees, lab supplies, costs incurred related to conducting scientific trials and field studies, regulatory compliance costs, and manufacturing costs associated with process improvement. Research and development expenses include an allocation of facilities related costs, including depreciation of research and development equipment. Stock-based Compensation 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 for stock options and the grant date market value for restricted stock units. The Company expenses the grant date fair value of its stock options on a straight-line basis over their respective vesting periods. F- 10 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 2. Summary of Significant Accounting Policies – (continued) The stock-based compensation expense recorded for the twelve months ended December 31, 2020 and 2019, is as follows: Twelve Months Ended December 31, 2020 2019 Research and development $ 9 $ 14 General and administrative 636 859 Total stock-based compensation expense $ 645 $ 873 See Note 11 for additional discussion on stock-based compensation. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities and net operating loss carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. These deferred tax assets are subject to periodic assessments as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recorded which would increase the provision for income taxes. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. 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 December 31, 2020 or December 31, 2019 and as such, no interest or penalties were recorded in income tax expense. Comprehensive Loss Net loss and comprehensive loss were the same for all periods presented; therefore, a separate statement of comprehensive loss is not included in the accompanying financial statements. Loss Per Share Attributable to Common Stockholders Basic loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share attributable to common stockholders is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if-converted methods. For purposes of the computation of diluted loss per share attributable to common stockholders, common stock purchase warrants, restricted stock units and common stock options are considered to be potentially dilutive securities but have been excluded from the calculation of diluted loss per share attributable to common stockholders because their effect would be anti-dilutive given the net loss reported for the years ended December 31, 2020 and 2019. Therefore, basic and diluted loss per share attributable to common stockholders was the same for all periods presented. F- 11 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 2. Summary of Significant Accounting Policies – (continued) The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted loss per share attributable to common stockholders (in common stock equivalent shares): December 31, 2020 2019 Common stock purchase warrants 2,582,697 489,176 Restricted stock unit 32,072 5,877 Common stock options 496,471 136,489 Total 3,111,240 631,542 In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This standard amends various aspects of existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early adoption was permitted, and the new standard had been adopted using a modified retrospective approach and provides for certain practical expedients. Effective January 1, 2019, the Company adopted Accounting Standards Updated (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). Under ASU No. 2016-02, an entity is required to recognize right-of-use lease assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The Company elected the optional transition method provided by the FASB in ASU 2018-11, Leases (Topic 842): Targeted Improvements , and as a result, has not restated its condensed consolidated financial statements for prior periods presented. The Company has elected the practical expedients upon transition to retain the lease classification and initial direct costs for any leases that existed prior to adoption. The Company has also not reassessed whether any contracts entered into prior to adoption are leases. The Company applied the new guidance to all operating leases within the scope of the standard that were in effect on January 1, 2019, or entered into after, the adoption date. Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption did not have a material impact on the Company’s consolidated statement of comprehensive income (loss). However, the new standard established $87 of liabilities and corresponding right-of-use assets of $87 on the Company’s consolidated balance sheet for leases, primarily related to operating leases on rented office properties, that existed as of the January 1, 2019, adoption date. At December 31, 2020, the balance in Right to Use Asset-Long Term and Lease Liability-Long Term was $665 and ($671) respectively. The Company’s leases primarily relate to operating leases of rented office properties. For contracts entered into on or after January 1, 2019, at the inception of a contract the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether the Company has the right to direct the use of the asset. At inception of a lease, the Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term. The right-of-use lease asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. F- 12 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 2. Summary of Significant Accounting Policies – (continued) The right-of-use lease asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred. All right-of-use lease assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s secured incremental borrowing rate for the same term as the underlying lease. The Company identified and assessed the following significant assumptions in recognizing the right-of-use lease assets and corresponding liabilities. Expected lease term – The expected lease term includes both contractual lease periods and, when applicable, cancelable option periods. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Incremental borrowing rate – As the Company’s leases do not provide an implicit rate, the Company obtained the incremental borrowing rate (“IBR”) based on the remaining term of each lease. The IBR is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company has elected not to recognize right-of-use lease assets and lease liabilities for short-term leases that have a term of 12 months or less. The Company reports right-of-use lease assets within non-current assets in its consolidated balance sheet. The Company reports the lease liabilities within long-term liabilities in its consolidated balance sheet. See Note 13, Commitments and Contingencies, for future minimum lease payments and maturities. In August 2018, the FASB issued ASU 2018-15 Accounting for Implementation Costs Related to Cloud Computing or Hosting Arrangements . This standard provides authoritative guidance intended to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires presentation of the capitalized implementation costs in the statement of financial position and in the statement of cash flows in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented, and the expense related to the capitalized implementation costs to be presented in the same line item in the statement of operations as the fees associated with the hosting element (service) of the arrangement. The Company adopted the provisions of ASU 2018-15 Accounting for Implementation Costs Related to Cloud Computing or Hosting Arrangements effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. There was no impact on our financial position, results of operations and statement of cash flows upon adoption of this guidance. Accounting Standards Issued but Not Yet Adopted There have been no new accounting pronouncements not yet effective or adopted in the current year that we believe have a significant impact, or potential significant impact, to our unaudited condensed consolidated interim financial statements. 3. Fair Value Measurements The Company issued common stock warrants to purchase shares of common stock in June of 2015 (see Note 9 - Common Stock Warrants and Common Stock Warrant Liability) that expired in June of 2020. These warrants contained a cash settlement provision that resulted in a common stock warrant liability that was revalued at the end of each reporting period. We valued these warrant derivatives at fair value. The accounting guidance for fair value, among other things, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The framework for measuring fair value consists of a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows: F- 13 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 3 - Fair Value Measurements – (continued) Level 1 —Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 —Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3 —Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques: A. Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. B. Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost). C. Income approach: Techniques to convert future amounts to a single present amount based upon market expectations, including present value techniques, option-pricing and excess earnings models. The Company’s common stock warrant liabilities were classified as Level 3 because there was limited activity or less transparency around the inputs to valuation. Financial Instruments Not Carried at Fair Value The carrying amounts of 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. 4. Credit Risk The Company is potentially subject to concentrations of credit risk in its accounts receivable. Credit risk with respect to receivables is limited due to the number of companies comprising the Company’s customer base, however the Company did identify a potentially uncollectable account and at December 31, 2019 and maintained a reserve for this receivable balance of $123. At December 31, 2020, the account was deemed uncollectable and offset against the reserve. The Company did not have any potentially uncollectable account at December 31, 2020 and therefore, did not record a reserve for uncollectable accounts at December 31, 2020. The Company does not require collateral or other securities to support its accounts receivable. F- 14 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 5. Prepaid expenses Prepaid expenses consist of the following: December 31, 2020 2019 Director compensation $ - $ 9 Director, officer and other insurance 18 115 Marketing programs and conferences 106 80 Legal retainer 25 25 Professional service retainer 8 8 Rent 18 11 Equipment service deposits - 1 Engineering, software licenses and other 3 8 Total prepaid expenses $ 178 $ 257 6. Property and Equipment Property and equipment, net consist of the following: December 31, Useful Life 2020 2019 Research and development equipment 5 years $ 1,397 $ 1,585 Office and computer equipment 3 years 733 753 Autos 5 years 54 54 Furniture and fixtures 7 years 41 41 Leasehold improvements * 283 283 Construction in progress 115 - 2,623 2,716 Less accumulated depreciation and amortization 2,085 1,978 Total $ 538 $ 738 * Shorter of lease term or estimated useful life (1) For the years ended December 31, 2020 and December 31, 2019, the Company received net proceeds of $47 and $0 in the sale of research and development equipment and office and computer equipment, respectively, resulting in gains on the sale of these assets of $21 and $0 for the years ended December 31, 2020 and December 31, 2019, respectively. Depreciation and amortization expense was approximately $288 and $413 for the year ended December 31, 2020 and 2019, respectively. 7. Accrued Expenses Accrued expenses consist of the following: December 31, 2020 2019 Compensation, severance and related benefits $ 218 $ 935 Accrued Litigation - 238 Personal property and franchise tax 57 2 Board Compensation 3 17 Other 14 1 Total accrued expenses $ 292 $ 1,193 F- 15 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 8. Borrowings A summary of the Company’s borrowings, including finance lease obligations, is as follows: At December 31, 2020 2019 Short-term debt: Current portion of long-term debt 98 123 Total short-term debt $ 98 $ 123 Long-term debt: Finance lease obligations $ 79 $ 155 Other unsecured promissory notes 692 105 Total 771 260 Less: current portion of long-term debt 98 123 Total long-term debt $ 673 $ 137 Finance Lease Obligations Finance lease obligations at December 31, 2020 are for computer and lab equipment leased through GreatAmerica Financial Services and ENGS Commercial Finance Co. These finance leases expire at various dates through April 2022 and carry interest rates ranging from 11.4% to 18.3%. Other Promissory Notes Also included in the table above are notes payable to Direct Capital, M2 Financing and Fidelity Capital, all for the financing of fixed assets. These notes expire at various dates through June 2022 and carry interest rates ranging from 13.1% to 13.3%. Also included in the table above is a loan agreement payable to BMO Harris Bank National Association as the lender in an aggregate principal amount of $645,700 pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The loan is evidenced by a promissory note dated April 15, 2020 and matures April 15, 2022. The loan bears interest at a rate of 1.00% per annum and contains customary events of default including, among other things, payment defaults. The loan closed and was funded April 20, 2020. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. The loan is subject to forgiveness to the extent proceeds are used for qualifying expenses, including certain payroll, utility, rent and mortgage interest expenses. No assurance is provided that the Company will obtain forgiveness of the loan in whole or in part. Pursuant to amendments to the CARES Act, as long as the Company submits its application for loan forgiveness within ten months after the expiration of the applicable covered period, the Company will not be required to make any payments until the forgiveness amount is remitted to the lender by the SBA. In the event the PPP loan is not forgiven in whole or in part, the lender is responsible for notifying the Company of the date on which the Company’s first repayment is due. 9. Common Stock Warrants and Common Stock Warrant Liability The table summarizes the common stock warrant activity as of December 31, 2020 as follows: Issue Date Warrant Type Term Date Exercise Price Balance December 31, 2018 Issued Exercised Expired Balance December 31, 2019 Issued Exercised Expired Balance December 31, 2020 2016 and prior Various Various-2020/2021 Various 17,059 - - - 17,059 - (9,375 ) (7,684 ) - November 21,2017 Common Stock Offering Warrants November 21, 2022 $ 1.3659 (1) 159,092 - (15,591 ) - 143,501 - - 143,501 November 21,2017 Dealer Manager Warrants November 21, 2022 $ 30.00 47,250 - - - 47,250 - (47,250 ) - - June 20,2018 Warrant Reissue December 20, 2023 $ 36.40 56,696 - - - 56,696 - - - 56,696 August 13,2018 Rights Offering Warrants July 25, 2023 $ 23.00 267,853 - (64,910 ) - 202,943 - - - 202,943 August 13,2018 Dealer Manager Warrants August 13, 2023 $ 34.50 13,393 - - - 13,393 - - - 13,393 July 16,2019 Dealer Manager Warrants July 11, 2024 $ 33.75 - 8,334 - - 8,334 - - - 8,334 January 28,2020 Registered Direct Offering July 28, 2025 $ 9.00 - - - - - 177,500 - - 177,500 January 28,2020 Dealer Manager Warrants July 28, 2025 $ 10.00 - - - - - 13,315 - - 13,315 March 6,2020 Registered Direct Offering September 8, 2025 $ 2.88 - - - - - 176,372 (176,372 ) - - March 6,2020 Dealer Manager Warrants March 4, 2025 $ 3.76 - - - - - 13,228 - - 13,228 April 21,2020 Dealer Manager Warrants April 21, 2025 $ 3.97 - - - - - 118,073 - - 118,073 April 24,2020 Registered Direct Offering April 24, 2025 $ 3.05 - - - - - 1,574,308 (1,524,308 ) - 50,000 October 26, 2020 Private Warrant Inducement April 27, 2026 $ 1.73 - - - - - 1,700,680 1,700,680 October 26, 2020 Dealer Manager Warrants April 27, 2026 $ 2.16 - - - - - 85,034 85,034 561,343 489,176 2,582,697 (1) The initial exercise price of these warrants was $30.00 per share. Pursuant to antidilution price adjustment protection contained within these warrants, the initial exercise price of these warrants was adjusted downward to $29.40 on July 24, 2018, the record date of the Right’s Offering and downward to $19.00 per share on August 13, 2018. These warrants were further adjusted downward from $19.00 to $7.13 and to $2.1122 on January 28, 2020 and March 4, 2020, respectively, in connection with separate Registered Direct Offerings. These warrants were further adjusted downward from $2.1122 to $1.3659 on October 26, 2020 in connection with a Registered Direct Offering. These warrants are subject to further adjustment pursuant to antidilution price adjustment protection. F- 16 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 9. Common Stock Warrants and Common Stock Warrant Liability – (continued) As of December 31, 2020, we had 2,582,697 shares of common stock issuable upon exercise of outstanding common stock warrants, at a weighted-average exercise price of $5.11 per share. On November 21, 2017, the Company issued a total of 232,875 detachable common stock warrants issued with the second public offering of 293,000 shares of its common stock at $20.00 per share. The common stock warrant is exercisable until five years from the date of grant. The common shares of the Company’s stock and detachable warrants exist independently as separate securities. As such, the Company estimated the fair value of the common stock warrants, exercisable at $30.00 per share, to be $661 using a lattice model based on the following significant inputs: common stock price of $20.00; comparable company volatility of 73.8%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 1.87. The initial exercise price of these warrants was $30.00 per share, which adjusted downward to $29.40 on July 24, 2018, the record date of the Right’s Offering and downward to $19.00 per share on August 13, 2018, the date of the Rights Offering, pursuant to antidilution price adjustment protection contained within these warrants. The exercise price of the warrants was adjusted downward to $7.13 on January 28, 2020 in connection with a private placement of common stock. Per guidance of ASC 260, the Company recorded a deemed dividend of $285 on the 143,501 unexercised warrants that contained this antidilution price adjustment protection provision and was calculated as the difference between the fair value of the warrants immediately prior to downward exercise price adjustment and immediately after the adjustment using a Black Scholes model based on the following significant inputs: On January 28, 2020, common stock price of $7.90; comparable company volatility of 73.8%; remaining term 2.82 years; dividend yield of 0% and risk-free interest rate of 1.45%. The exercise price of the warrants was adjusted downward to $2.1122 on March 4, 2020 in connection with a private placement of common stock. Per guidance of ASC 260, the Company recorded a deemed dividend of $129 on the 143,501 unexercised warrants that contained this antidilution price adjustment protection provision and was calculated as the difference between the fair value of the warrants immediately prior to downward exercise price adjustment and immediately after the adjustment using a Black Scholes model based on the following significant inputs: On March 4, 2020, common stock price of $2.88; comparable company volatility of 74.5%; remaining term 2.71 years; dividend yield of 0% and risk-free interest rate of 0.68%. The exercise price of the warrants was adjusted downward to $1.3659 on October 26, 2020 in connection with an inducement offering of common stock. Per guidance of ASC 260, the Company recorded a deemed dividend of $22 on the 143,501 unexercised warrants that contained this antidilution price adjustment protection provision and was calculated as the difference between the fair value of the warrants immediately prior to downward exercise price adjustment and immediately after the adjustment using a Black Scholes model based on the following significant inputs: On October 26, 2020, common stock price of $1.47; comparable company volatility of 96.5%; remaining term 2.08 years; dividend yield of 0% and risk-free interest rate of 0.18%. On June 20, 2018, the Company entered into an agreement with a holder of 56,696 of the November 2017 warrants to exercise its original warrant representing 56,696 shares of common stock for cash at the $30.00 exercise price for gross proceeds of $1.7 million and the Company issued to holder a new warrant to purchase 56,696 shares of common stock at an exercise price of $36.40 per share. The new warrant did not contain the antidilution price adjustment protection that was contained within the exercised warrants. In June 2018, the Company recorded stock compensation expense of $1,700 representing the fair value of the of 56,696 inducement warrants issued. The Company estimated the fair value of the common stock warrants, exercisable at $36.40 per share, to be $1,700 using a Black Scholes model based on the following significant inputs: common stock price of $42.20; comparable company volatility of 72.6%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 2.8%. Also, in June 2018, an additional 17,088 of the November 8, 2017 warrants that were in the money at the time of exercise, were exercised for gross proceeds of $513. On August 13, 2018, in connection with a Rights Offering of 267,853 shares of its common stock, the Company issued 267,853 warrants to purchase shares of its common stock at an exercise price of $23.00 per share. The Company estimated the fair value of the common stock warrants, exercisable at $23.00 per share, to be $3,600 using a Monte Carlo model based on the following significant inputs: common stock price of $18.80; comparable company volatility of 159.0%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 2.77%. In connection with the closing of the Rights Offering, the Company issued a warrant to purchase 13,393 shares of common stock to Maxim Partners LLC, an affiliate of the dealer-manager of the Rights Offering. The Company estimated the fair value of the common stock warrants, exercisable at $34.50 per share, to be $169 using a using a Monte Carlo model based on the following significant inputs: common stock price of $18.80; comparable company volatility of 159.0%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 2.77%. F- 17 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 9. Common Stock Warrants and Common Stock Warrant Liability – (continued) Common Stock Warrant Issued to Underwriter of Common Stock Offering In July 2019, the Company issued to H.C. Wainwright & Co., as placement agent, a warrant to purchase 8,334 shares of common stock at an exercise price of $33.75 per share as consideration for providing services in connection with a common stock offering in July 2019. The warrant was fully vested and exercisable on the date of issuance. The common stock warrant is exercisable until five years from the date of grant. The Company estimated the fair value of the common stock warrants, exercisable at $33.75 per share, to be $127 using a lattice model based on the following significant inputs: common stock price of $26.80; comparable company volatility of 133.3%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 2.07%. 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 750 shares of common stock at an exercise price of $150.00 per share. The warrant was fully vested and exercisable on the date of grant, and expires, if not exercised, five years from the date of grant. In the event of a “terminating change” of the Company, as defined in the warrant agreement, the warrant holder would be paid in cash the aggregate fair market value of the underlying shares immediately prior to the consummation of the terminating change event. Due to the cash settlement provision, the derivative warrant liability was recorded at fair value and is revalued at the end of each reporting period. The changes in fair value are reported in other income (expense) in the statements of operations and comprehensive loss. The estimated fair value of the derivative warrant liability was $53 at the date of grant. These warrants expired, unexercised, on June 26, 2020. Common Stock Warrants Issued in January and March 2020 Private Placements In January and March 2020, in separate private placements concurrent with registered direct offerings (collectively, the “2020 Registered Direct Offerings”) of shares of the Company’s common stock, the Company also issued warrants to purchase an aggregate of up to 353,872 shares of common stock to certain institutional and accredited investors that participated in the 2020 Registered Direct Offerings (the “2020 Warrants”). The warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. Terms used but not otherwise defined herein will have the meanings given them in the warrants, attached as Exhibit 4.1 to our Form 8-K filed on January 28, 2020, and our Form 8-K filed on March 6, 2020. The warrants issued in January 2020 to purchase 177,500 shares of common stock have an exercise price of $9.00 per share, are exercisable after July 28, 2020 and will expire July 28, 2025. The Company estimated the fair value of the common stock warrants, exercisable at $9.00 per share, to be $813 using a Black Scholes model based on the following significant inputs: common stock price of $7.90; comparable company volatility of 73.8%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 1.53%. The warrants issued in March 2020 to purchase 176,372 shares of common stock have an exercise price of $2.88 per share, are immediately exercisable and will expire September 8, 2025. The Company estimated the fair value of the common stock warrants, exercisable at $2.88 per share, to be $242 using a Black Scholes model based on the following significant inputs: common stock price of $2.35; comparable company volatility of 74.8%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.39%. For so long as the 2020 Warrants remain outstanding, the exercise price and number of shares of common stock issuable upon exercise of the warrants are subject to adjustment as follows: (a) upon payment of a stock dividend or other distribution on a class or series of shares common stock, not including shares issued under this warrant; (b) upon subdivision (by stock spilt, stock dividend, recapitalization, or otherwise) or combination (by reverse stock split or otherwise) of shares of common stock; or (c) upon the issuance of any shares of capital stock by reclassification of shares of the common stock. F- 18 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 9. Common Stock Warrants and Common Stock Warrant Liability – (continued) In the event that the Company declares or makes any dividend or other distribution of its assets to holders of its common stock, each 2020 Warrant holder will be entitled to participate in such distribution to the same extent that such holder would have participated therein if the holder had held the number of shares of common stock acquirable upon exercise of the 2020 Warrant. In the event of a Fundamental Transaction, as described in the 2020 Warrants and generally including the sale, transfer or other disposition of all or substantially all of our properties or assets; our consolidation or merger with or into another person or reorganization; a recapitalization, reorganization or reclassification in which our common stock is converted into other securities, cash or property; or any acquisition of our outstanding common stock that results in any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, then the holders of the 2020 Warrants will be entitled to receive upon exercise of such warrants the kind and amount of securities, cash, assets or other property that the holders would have received had they exercised the 2020 Warrants immediately prior to such Fundamental Transaction. Subject to certain limitations, in the event of a Fundamental Transaction the 2020 Warrant holder may at its option require the Company or any Successor Entity to purchase such warrant from the holder by paying to the holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of the 2020 Warrant on the date of the consummation of the Fundamental Transaction. Any time that the Company grants, issues, or sells any securities pro rata to all of the record holders of the common stock (the “2020 Purchase Right”), each holder of 2020 Warrants will be entitled to acquire the aggregate amount of securities that the holder could have acquired if the holder had held the number of shares of common stock acquirable upon exercise of the applicable 2020 Warrant. However, to the extent that an exercise of a 2020 Purchase Right would exceed the Beneficial Ownership Limitation (defined below), then to such extent the 2020 Purchase Right will be held in abeyance until such time, if ever, that complete exercise of the 2020 Purchase Right would not exceed the Beneficial Ownership Limitation. After the Initial Exercisability Date, the 2020 Warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise. If, at the time a holder exercises the 2020 Warrant (but not sooner than six months following the date of such warrant), a registration statement registering the issuance of the shares of common stock underlying the 2020 Warrants under the Securities Act is not then effective or available, nor is any current prospectus thereto available, and an exemption from registration under the Securities Act is not available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the number of shares of common stock determined according to a formula set forth in the 2020 Warrant. Limitations on Exercise . A holder (together with its affiliates) may not exercise any portion of the 2020 Warrants to the extent that the holder would own more than 4.99% of the outstanding common stock after exercise (the “Beneficial Ownership Limitation”), except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the Beneficial Ownership Limitation up to 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the 2020 Warrants. No fractional shares of common stock will be issued in connection with the exercise of a 2020 Warrant. In lieu of fractional shares, we will either pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price or round up to the next whole share. Except as otherwise provided in the 2020 Warrants or by virtue of such holder’s ownership of shares of our common stock, the holders of the 2020 Warrants do not have the rights or privileges of holders of our common stock, including any voting rights, unless and until they exercise such warrants. Common Stock Warrants Issued in April 2020 Public Offering On April 24, 2020, in connection with a previously announced public offering of 145,586 Class A Units and 1,428,722 Class B Units, the Company issued warrants to purchase 1,574,308 shares of common stock to the participants in the public offering and have an exercise price of $3.05 per share (the “April 2020 Warrants”). These warrants are immediately exercisable and will expire April 24, 2025. F- 19 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 9. Common Stock Warrants and Common Stock Warrant Liability – (continued) The Common Stock, Pre-Funded Warrants and Warrants sold in this Public Offering were offered and sold pursuant to a registration statement on Form S-1 (File No. 333-236302) initially filed with the Securities and Exchange Commission (the “ SEC ”) on February 7, 2020, as amended (“Registration Statement”), which was declared effective by the SEC on February 14, 2020. The Post-Effective Amendment No. 2 to the Registration Statement was declared effective by the SEC on April 21, 2020. The Company estimated the fair value of the common stock warrants, exercisable at $3.05 per share, to be $2,402 using a Black Scholes model based on the following significant inputs: common stock price of $2.40; comparable company volatility of 87.9%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 0.18%. Common Stock Warrants Issued to Placement Agent in 2020 Registered Direct Offerings and Private Placement In connection with the separate private placements concurrent with registered direct offerings of shares of the Company’s common stock in January and March 2020, the Company issued to H.C. Wainwright & Co., LLC, as placement agent, a warrant to purchase 13,228 shares of common stock and a warrant to purchase 13,313 shares of common stock. The warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. These warrants have substantially similar terms as the 2020 Warrants described above, except that the placement agent warrant issued in January 2020 has an exercise price of $10.00 per share, and the placement agent warrant issued in March 2020 has an exercise price of $3.7563 per share. The Company estimated the fair value of the common stock warrants issued in January, with an exercise price of $10.00 per share, to be $58 using a Black Scholes model based on the following significant inputs: common stock price of $7.90; comparable company volatility of 73.8%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 1.53%. The Company estimated the fair value of the common stock warrants issued in March, with an exercise price of $3.7563 per share, to be $17 using a Black Scholes model based on the following significant inputs: common stock price of $2.35; comparable company volatility of 74.8%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.39%. In connection with the public offering of 145,586 Class A Units and 1,428,722 Class B Units on April 24, 2020, the Company issued to H.C. Wainwright & Co., LLC, as placement agent, warrants to purchase 118,073 shares of common stock. The warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. These warrants have substantially similar terms as the April 2020 Warrants described above, except that the placement agent warrant issued has an exercise price of $3.97 per share. The Company estimated the fair value of the common stock warrants issued in April, with an exercise price of $3.97 per share, to be $167 using a Black Scholes model based on the following significant inputs: common stock price of $2.40; comparable company volatility of 87.9%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.18%. Common Stock Warrants Issued in October 2020 Private Warrant Inducement In October 2020, in connection with an inducement agreement with an existing accredited investor to exercise 1,700,680 outstanding warrants to purchase an equal number of shares of the Company’s common stock, the Company issued new unregistered warrants to purchase up to an aggregate of 1,700,680 shares of common stock at an exercise price of $1.725 per share. The warrants issued were immediately exercisable with an exercise period of five and one-half years from the date of issuance. The Original Warrants were issued on March 6, 2020 and on April 24, 2020. Pursuant to the Letter Agreement, the per share exercise price of the Original Warrants were reduced from $2.88 and $3.05, respectively, to $1.725. The Company estimated the fair value of the common stock warrants, exercisable at $1.725 per share, to be $1,806 using a Black Scholes model based on the following significant inputs: common stock price of $1.47; comparable company volatility of 96.5%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.18%. F- 20 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 9. Common Stock Warrants and Common Stock Warrant Liability – (continued) Common Stock Warrants Issued to Placement Agent in October 2020 Inducement Offering In connection with the private warrant inducement in October 2020 of 1,700,680 shares of the Company’s common warrants, the Company issued to H.C. Wainwright & Co., LLC, as placement agent, warrants to purchase 85,034 shares of common stock. These warrants have substantially similar terms as the 2020 Warrants described above, except that the placement agent warrant issued in October 2020 has an exercise price of $2.156 per share. The Company estimated the fair value of these common stock warrants, with an exercise price of $2.156 per share, to be $86 using a Black Scholes model based on the following significant inputs: common stock price of $1.47; comparable company volatility of 96.5%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.18%. Deemed Dividend Adjustment-Warrant Modified Terms Revaluation On December 2, 2019, in connection with the settlement of a filed lawsuit against the Company on February 20, 2018 by New Enterprises, Ltd. (“New Enterprises”), the Company agreed to modify the terms of 6,934 common stock warrants that were originally issued to New Enterprises between September 2015 and February 2016. Specifically, the original strike price was reduced to $20.00 per warrant from $150.00 per warrant and the expiration date of these warrants was extended one year to December 13, 2020. Per guidance of ASC 260, the Company recorded a deemed dividend of $11 on the 6,934 unexercised warrants that were affected by the modification of terms. The dividend was calculated as the difference between the fair value of the warrants immediately prior to modification of terms and immediately after the adjustment using a Black Scholes model based on the following significant inputs: On December 2, 2019: common stock price of $12.00; comparable company volatility of 73.2%; remaining term 0.01 years; dividend yield of 0% and risk-free interest rate of 1.63. As adjusted, common stock price of $12.00; comparable company volatility of 73.2%; remaining term 1.01 years; dividend yield of 0% and risk-free interest rate of 1.63. On March 3, 2020, the Company issued an aggregate of 51,414 common shares in a cashless exercise of 56,625 warrants issued in December 2016 and November 2017. Consideration for the exercise of these warrants was the full settlement of an outstanding litigation reserve of $238. On October 26, 2020, in connection with the private warrant inducement with an existing accredited investor to exercise 1,700,680 outstanding warrants (“Original Warrants”), the Company agreed to modify the terms of the Original Warrants that were originally issued on March 6, 2020 and on April 24, 2020. Pursuant to the agreement, the per share exercise price of the Original Warrants were reduced from $2.88 and $3.05, respectively, to $1.725. Per recent proposed guidance of ASC 260, the Company determined that this was an exchange of the existing 1,700,680 warrants that were affected and the difference between the fair value of the warrants immediately prior to modification of terms and immediately after the adjustment was a cost of raising capital and was recorded as a reduction of equity. The difference between the fair value of the warrants immediately prior to modification of terms and immediately after the adjustment was calculated as $237, using a Black Scholes model based on the following significant inputs: On October 26, 2020: common stock price of $1.47; comparable company volatility of 96.5%; remaining term 4.5-4.8 years; dividend yield of 0% and risk-free interest rate of 0.18. F- 21 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 10. Stockholders’ Deficit Capital Stock The Company was organized under the laws of the state of Nevada on July 27, 2004 and was subsequently reincorporated under the laws of the state of Delaware on November 10, 2015. In connection with the reincorporation, as approved by the stockholders, the Company changed its authorized capital stock to consist of (i) 100 million shares of common stock, $.001 par value, and (ii) 2 million shares of preferred stock, $0.001 par value, designated as Series A convertible preferred stock. In December 2015, the Company amended its Certificate of Incorporation to change its authorized capital stock to provide for 15 million authorized shares of preferred stock of which 7,515,000 was designated as Series B convertible preferred stock, par value $.001 per share. Prior to November 10, 2015, the Company’s authorized capital stock consisted of 100 million shares of common stock, $.001 par value, and 10 million shares of preferred stock, $.001 par value. Common Stock The Company had 5,099,512 and 1,414,671 shares of common stock issued and outstanding as of December 31, 2020 and December 31, 2019, respectively. During the year ended December 31, 2020, the Company issued 3,684,841 shares of common stock as follows: ● an aggregate of 177,500 shares in connection with a registered direct offering generating net proceeds to the Company in January 2020 of approximately $973, as further described below; ● an aggregate of 176,372 shares in connection with a registered direct offering generating net proceeds to the Company in March 2020 of approximately $462, as further described below; ● an aggregate of 1,700,680 shares in connection with an inducement offering exercise of warrants, generating net proceeds to the Company in October 2020 of approximately $2,600, as further described below; ● an aggregate of 1,574,308 shares in connection with a public offering and exercise of pre-funded warrants issued in connection with said public offering, generating net proceeds to the Company in April 2020 of approximately $4,306, as further described below; ● an aggregate of 51,414 shares for the exercise of outstanding warrants in settlement of an outstanding litigation reserve of $238 (see Note 9 - Common Stock Warrants and Common Stock Warrant Liability for further details); ● an aggregate of 4,543 shares for service as a result of the vesting of restricted stock units; and ● an aggregate of 24 shares for true up of shares as a result of the 1-for-20 reverse stock split effected in February 2020. Public Offerings and Registered Direct Offerings On October 26, 2020, the Company closed a private warrant inducement agreement with an existing accredited investor to exercise certain outstanding warrants to purchase an aggregate of 1,700,680 shares of the Company’s common stock at an exercise price per share of $1.725 (the “Original Warrants”). The Original Warrants were issued on March 6, 2020 and on April 24, 2020. Pursuant to the agreement, the per share exercise price of the Original Warrants were reduced from $2.88 and $3.05, respectively, to $1.725. F- 22 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 10. Stockholders’ Deficit – (continued) 1,524,308 shares of common stock issuable upon exercise of the Original Warrants issued on March 6, 2020 are registered for resale pursuant to an effective registration statement on Form S-3 (File No. 333-237563) and all 176,372 shares of common stock issuable upon exercise of the Original Warrants issued on April 24, 2020 are registered for resale pursuant to an effective registration statement on Form S-3 (File No. 333-236302). The net proceeds to the Company from the Exercise were approximately $2.6 million, after deducting placement agent fees and offering expenses. In consideration for the immediate exercise of the Original Warrants for cash, the exercising holder will receive a new unregistered warrant to purchase up to an aggregate of 1,700,680 shares of common stock (the “New Warrant”) in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The New Warrant will have an exercise price of $1.725 per share, with an exercise period of five and one-half years from the date of issuance. In connection with the agreement, the Company agreed to issue the placement agent warrants to purchase up to 85,034 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants have substantially the same terms as the Warrants, except that the exercise price is $2.156 per share. The Placement Agent Warrants, and the shares of issuable upon exercise thereof, will be issued in reliance on the exemption from registration provided in Section 4(a)(2) under of the Securities Act of 1933, as amended (“Securities Act”) and Regulation D promulgated thereunder. On April 24, 2020, the Company closed a public offering of 145,586 Class A Units and 1,428,722 Class B Units. Each unit is comprised of one share of common stock, par value $0.001 per share or common stock equivalent in the form of a pre-funded warrant and one warrant to purchase one share of common stock. The Class A Units were offered at a public offering price of $3.176 per unit, and the Class B Units were offered at a public offering price of $3.175 per unit priced at-the-market under Nasdaq rules, generating net proceeds of approximately $4,306, including the full exercise of the pre-funded warrants sold in this offering and after deducting certain fees due to the placement agent and other estimated transaction expenses. Also, in connection with the public offering noted above, the Company issued warrants to purchase 1,574,308 shares of common stock to the participants in the public offering, with an exercise price of $3.05 per share. These warrants are immediately exercisable and will expire April 24, 2025. On March 6, 2020, the Company closed a registered direct offering of an aggregate of 176,372 shares of our common Stock at a purchase price of $3.005 per share for aggregate net proceeds of approximately $462, after deducting certain fees due to the placement agent and other estimated transaction expenses. In addition, we also issued warrants exercisable for an aggregate of up to 176,372 shares of our common stock with an exercise price of $2.88 per share. In addition, in connection with the offering, we issued the placement agent five-year warrants to purchase up to 13,228 shares of our common Stock at an exercise price of $3.7563 per share. On January 28, 2020, the Company closed a registered direct offering of an aggregate of 177,500 shares of our common stock at a purchase price of $8.00 per share for aggregate net proceeds of approximately $973, after deducting certain fees due to the placement agent and other estimated transaction expenses. In addition, in a concurrent private placement, we also issued and sold warrants exercisable for an aggregate of up to 177,500 shares of our common stock with an exercise price of $9.00 per share. In connection with the offering, we issued the placement agent five-year warrants to purchase up to 13,312 shares of our common stock at an exercise price of $10.00 per share. F- 23 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 11. Stock-based Compensation On June 12, 2018, the Company’s stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”) to replace the Company’s 2015 Equity Incentive Plan (the “2015 Plan”). On July 8, 2020, the Company’s stockholders approved an amendment to the 2018 Plan to increase the number of shares of common stock available for issuance under the 2018 Plan by 800,000 shares from 50,000 to 850,000. In addition, up to 122,279 shares of our common stock previously reserved for issuance under the 2015 Plan are available for issuance under the 2018 Plan to the extent such shares were available for issuance under the 2015 Plan as of June 12, 2018 or thereafter cease to be subject to awards outstanding under the 2015 Plan, such as by expiration, cancellation, or forfeiture of such awards. Stock options are generally issued with a per share exercise price equal to no less than fair market value of our common stock at the date of grant. Options granted under the 2018 Plan generally vest immediately, or ratably over a two- to 36-month period coinciding with their respective service periods. Options under the 2018 Plan generally have a term of five years. Certain stock option awards provide for accelerated vesting upon a change in control. As of December 31, 2020, the Company had 430,622 shares of common stock available for issuance under the 2018 Plan. Stock Options The Company measures the fair value of stock options with service-based vesting criteria to employees, directors and consultants on the date of grant using the Black-Scholes option pricing model. The Black-Scholes valuation model requires 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 will be outstanding, the rate of return on risk-free investments, and the expected dividend yield for the Company’s stock. The weighted-average assumptions used in the Black-Scholes option-pricing model used to calculate the fair value of options granted during the year ended December 31, 2020 were as follows: Employee Expected volatility 88.1%-96.0% Expected dividend yield - Expected term (in years) 5.0 Risk-free interest rate 0.11-0.26% The weighted average grant date fair value of options granted during the year ended December 31, 2020 was $1.37 per share, as per the table below. The weighted-average assumptions used in the Black-Scholes option-pricing model used to calculate the fair value of options granted during the year ended December 31, 2019, were as follows: Employee Expected volatility 71.0%-79.8% Expected dividend yield - Expected term (in years) 3.0-5.0 Risk-free interest rate 1.63%-2.48% 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 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 interest rate is determined by reference to the implied yields of U.S. Treasury securities with a remaining term equal to the expected term assumed at the time of grant. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not intend to pay dividends. F- 24 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 11. Stock-based Compensation – (continued) The table summarizes the stock option activity, for both the 2018 and 2015 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) Outstanding at December 31, 2018 86,059 $ 31.40 4.0 $ - Granted 58,396 $ 25.80 4.9 $ - Exercised (3,450 ) $ 13.00 - $ - Forfeited (3,445 ) $ - - $ - Expired (1,071 ) $ - - $ - Outstanding at December 31, 2019 136,489 $ 27.85 3.9 $ - Granted 370,397 $ 1.37 4.9 $ - Exercised - $ - - $ - Forfeited (10,415 ) $ - - $ - Expired - $ - - $ - Outstanding at December 31, 2020 496,471 $ 8.63 3.9 $ - Exercisable at December 31, 2020 199,862 $ 15.75 1.8 $ - (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 $1.73 and $11.00 per share for each of the years ended December 31, 2020 and 2019, respectively. The weighted average grant date fair value of options granted to employees for the year ended December 31, 2020 was $1.37 per share. At December 31, 2020, the total compensation cost related to non-vested options not yet recognized was $850, which will be recognized over a weighted average period of 27 months, assuming the grantees complete their service period required for vesting. Restricted Stock Units The following table summarizes restricted stock unit activity for the years ended December 31, 2020 and 2019: Number of Units Weighted Average Grant Date Fair Value Per Unit Outstanding as of December 31, 2018 6,813 $ 19.60 Granted 6,191 (1) $ 30.20 Vested (7,127 ) $ 22.00 Forfeited - $ - Outstanding as of December 31, 2019 5,877 $ 30.28 Granted 30,738 (2) $ 1.97 Vested (4,543 ) $ 1.42 Forfeited - $ - Outstanding as of December 31, 2020 32,072 $ 4.05 (1) 314 restricted stock units were granted on February 14, 2019 with a weighted average grant date fair value of $17.09. 3,877 restricted stock units were granted on June 18, 2019 with a weighted average grant date fair value of $28.40. 2,000 restricted stock units were granted on June 30, 2019 with a weighted average grant date fair value of $36.00. (2) 30,738 restricted stock units were granted on July 23, 2020 with a weighted average grant date fair value of $1.97. F- 25 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 11. Stock-based Compensation – (continued) The stock-based compensation expense was recorded as follows: Years Ended December 31, 2020 2019 Research and development $ 9 $ 14 General and administrative 636 859 Total stock-based compensation expense $ 645 $ 873 The allocation between research and development and general and administrative expense was based on the department and services performed by the employee or non-employee. 12. Income Taxes The components of the pretax loss from operations for the years ended December 31, 2020 and 2019 are as follows (in thousands) Years Ended December 31, 2020 2019 U.S. Domestic (8,373 ) (10,029 ) Foreign - - Pretax loss from operations (8,373 ) (10,029 ) The provision for income taxes from continuing operations for the years ended December 31, 2020 and 2019 are as follows: Years Ended December 31, 2020 2019 Current Federal - - State - - Foreign - - Total current - - Deferred Federal - - State - - Foreign - - Total deferred - - Total income tax expense (benefit) - - Tax Rate Reconciliation A reconciliation of income taxes to the amount computed by applying the statutory federal income tax rate to the net loss is summarized as follows (in thousands): Years Ended December 31, 2020 2019 Income tax benefit at statutory rates (1,758 ) (2,106 ) State income tax, net of federal benefit (309 ) (337 ) Permanent items 1 5 Stock-based compensation 84 27 Tax Rate Adjustment – TCJA - - Change in rate - - Stock Compensation DTA Adjustment - - Change in Valuation Allowance 1982 2,408 ) RTP and Other - 3 Income tax expense (benefit) - - F- 26 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 12. Income Taxes – (continued) Significant components of the Company’s deferred tax assets as of December 31, 2020 and 2019 are shown below. A valuation allowance has been recognized to offset the net deferred tax assets as realization of such deferred tax assets have not met the more likely than not threshold. December 31, 2020 2019 Deferred tax assets: ASC 842 Leases 167 173 Federal and State Net Operating Loss Carryovers 17,548 15,492 Stock Based Compensation 289 230 Compensation Accruals and Other 84 245 Depreciation 17 - Total deferred tax assets 18,105 16,140 Valuation Allowance for deferred tax assets (17,940 ) (15,958 ) Deferred tax assets, net of valuation allowance 165 182 Deferred tax liabilities: Depreciation - (8 ) ASC 842 Assets (165 ) (174 Total deferred tax liabilities (165 ) (182 ) - - At December 31, 2020, the Company has federal and state net operating loss carryforwards of approximately $69.5 million and $56.1 million, respectively, not considering the IRC Section 382 annual limitation discussed below. The federal loss carryforwards begin to expire in 2029, unless previously utilized. In addition, the Company has approximately $25.1 million of the total $69.5 million of net operating losses that do not expire, as these losses were generated after the law change introduced as part of the Tax Cuts and Jobs Act. Additionally, the utilization of the net operating loss carryforwards could be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state tax provisions due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes limit the amount of net operating loss carryforwards and other deferred tax assets that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. The Company has not conducted an analysis of an ownership change under section 382. To the extent that a study is completed and an ownership change is deemed to occur, the Company’s net operating losses could be limited. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits at the beginning and end of the years ended December 31, 2020 and 2019 (in thousands): Years Ended December 31, 2020 2019 Gross unrecognized tax benefits at the beginning of the year - - Increases related to current year positions - - Increases related to prior year positions - - Decreases related to prior year positions - - Expiration of unrecognized tax benefits - - Gross unrecognized tax benefits at the end of the year - - None of the unrecognized tax benefits would affect the Company’s annual effective tax rate. The Company does not expect a significant change in unrecognized tax benefits over the next 12 months. The Company files income tax returns in the United States and Arizona with general statutes of limitations of 3 and 4 years, respectively. Due to net operating losses incurred, the Company’s tax returns from inception to date are subject to examination by taxing authorities. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. As of December 31, 2020, the Company had no interest or penalties accrued for uncertain tax positions. F- 27 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 12. Income Taxes – (continued) On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. The Company has concluded that the CARES Act did not have a material impact on its financial position, results of operations, or cash flows. On December 27, 2020, the United States enacted the Consolidated Appropriations Act which extended many of the benefits of the CARES Act that were scheduled to expire. The Company is evaluating the impact of the Consolidated Appropriations Act on its consolidated financial statements and related disclosures, but does not anticipate the impact to be material. 13. 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. Lease Commitments The Company is obligated under finance leases for certain research and computer equipment that expire on various dates through July 2023. At December 31, 2020, the gross amount of office and computer equipment, and research equipment and the related accumulated amortization recorded under the finance leases was $478 and $356, respectively. In February 2012, the Company entered into an operating lease for its then corporate headquarters in Flagstaff, Arizona. The lease was originally due to expire in January 2015. In December 2013, the Company amended its lease to expand into the remaining area in the building and extended the term to December 31, 2019. In February 2014, the Company further amended the lease to expand into an adjacent building. The lease requires escalating rental payments over the lease term. Minimum rental payments under the operating lease are recognized on a straight-line basis over the term of the lease and accordingly, the Company records the difference between the cash rent payments and the recognition of rent expense as a deferred rent liability. The lease was guaranteed by the former President of the Company. In December 2019, we extended the current lease for only our manufacturing facilities are located in Flagstaff, Arizona, occupying a total of 7,632 square feet of space. The lease for our manufacturing facilities expired in December 2020. On November 16, 2016, we leased an additional 1,954 square feet of research and development space, also in Flagstaff. This lease expired on November 15, 2018 but was extended for an additional 24 months, through November 2020. A subsequent amendment to the lease allows for the Company to cancel the lease at any time through the lease term with 30 days notice. The Company provided a 30-day cancellation notice effective February 2020. On December 1, 2019, we entered into a lease for our corporate headquarters in Phoenix, Arizona where we lease and occupy approximately 5,529 square feet of office space. This lease expires in November 2024. On August 1, 2020, we entered into a lease for our manufacturing and research facility in Phoenix, Arizona where we occupy approximately 5,105 square feet of manufacturing and warehouse space. This lease expires on November 30, 2024. We believe that our existing facilities are adequate and meet our current needs for business, manufacturing and research. Rent expense was $286 and $253 for the years ended December 31, 2020 and 2019, respectively. The future minimum lease payments under non-cancellable operating lease and future minimum finance lease payments as of December 31, 2020 are follows: Finance Leases Operating Lease Years Ending December 31, 2021 58 190 2022 28 194 2023 - 198 2024 - 186 Total minimum lease payments $ 86 $ 768 F- 28 SENESTECH, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share and per share data) 13. Commitments and Contingencies – (continued) Finance Leases Less: amounts representing interest (6.39%, ranging from 10.48% to 11.56%) $ (7 ) Present value of minimum lease payments 79 Less: current installments under finance lease obligations (52 ) Total long-term portion $ 27 14. Subsequent Events On February 2, 2021, the Company consummated a private placement agreement with certain institutional and accredited investors and issued an aggregate of 3,968,854 shares of its common stock, par value $0.001 per share at a purchase price of $2.2785 per share, pre-funded warrants to purchase up to an aggregate of 420,000 shares of common stock at a purchase price of $2.2775 per pre-funded warrant and associated warrants to purchase up to an aggregate of 2,194,427 shares of common stock, for gross proceeds of approximately $10.0 million, prior to deducting placement agent fees and offering expenses. The pre-funded warrants have an exercise price of $0.001 per share, are exercisable immediately, and may be exercised at any time until such pre-funded warrants are exercised in full. The warrants have an exercise price of $2.216 per share, are exercisable immediately, and have an exercise period of five and one-half years from the date of issuance. A holder of a pre-funded warrant or the warrant may not exercise any portion of such holder’s pre-funded warrants or warrants to the extent that the holder, together with its affiliates, would beneficially own more than 4.99% (or, at the election of the holder, 9.99%) of the Company’s outstanding shares of common stock immediately after exercise, except that upon at least 61 days’ prior notice from the holder to the Company, the holder may increase the beneficial ownership limitation to up to 9.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise. At March 29, 2021, all 420,000 pre-funded shares had been distributed. The net proceeds to the company from the private placement were approximately $9.2 million, after deducting placement agent fees and expenses and estimated offering expenses payable by the Company. The Company intends to use the net proceeds from the private placement for general corporate purposes. In connection with the private placement agreement, the Company entered into a registration rights agreement with the purchasers, pursuant to which, among other things, the Company will prepare and file with the Securities and Exchange Commission a registration statement on Form S-3 to register for resale the shares and the shares of common stock issuable upon the exercise of the pre-funded warrants and the warrants. H.C. Wainwright & Co., LLC acted as exclusive placement agent for the private placement. In connection with the private placement, the Company agreed to pay the placement agent a cash fee equal to 7.5% of the gross proceeds of the private placement and a management fee of 1.0% of the gross proceeds of the private placement and reimburse the placement agent for a non-accountable expense allowance of $25 and accountable expenses of $50. The Company also agreed to issue the placement agent warrants to purchase up to 7.5% of the aggregate number of shares issuable to the investors in the private placement, or 329,164 shares of Common Stock with an exercise price of $2.8481 per share. The warrants are exercisable immediately and have an exercise period of five and one-half years from the date of issuance. On March 23, 2021, the Company consummated a registered direct offering with certain institutional investors and issued an aggregate of 1,975,000 shares of the Company’s common stock, par value $0.001 per share at a purchase price of $2.00 per share for gross proceeds to the Company of approximately $3.95 million, before deducting fees payable to the placement agent and other estimated offering expenses payable by the Company. The 1,975,000 shares of Common Stock sold in the Offering were offered and sold pursuant to a prospectus, dated August 24, 2018, and a prospectus supplement, dated March 22, 2021, in connection with a takedown from the Company’s shelf registration statement (“ Registration Statement ”) on Form S-3 (File No. 333-225712). In connection with the Offering, the Company agreed to pay the placement agent a cash fee equal to 7.5% of the gross proceeds of the Offering, a management fee of 1% of the gross proceeds of the Offering, a non-accountable expense allowance of $25 and up to $50 for reasonable and documented out-of-pocket expenses. The Company also agreed to issue the placement agent warrants to purchase up to 7.5% of the aggregate number of shares of Common Stock sold in the Offering, or 148,125 shares of Common Stock. The Placement Agent Warrants will be exercisable commencing six months following the date of issuance, expire five years following the date of sale and have an exercise price per share of $2.50 per share. The Placement Agent Warrants, and the shares of Common Stock issuable upon exercise thereof, will be issued in reliance on the exemption from registration provided in Section 4(a)(2) under the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. On March 19, 2021, the Company issued an aggregate of 700,680 shares of commons stock for the exercise of certain warrants. The net proceeds to the Company for these exercises was $1,209. COVID-19 The travel and other restrictions that began in March 2020 in response to the COVID-19 global pandemic have resulted in a significant slowdown in our field studies and sales efforts. We were able to resume some projects by late-April 2020, however, we still have delays on certain projects that might remain on hold until certain government restrictions are lifted. These delays have impacted our results of operations and could impact our results in future quarters. In addition, stay at home orders and other social distancing initiatives continue to severely limit our ability to communicate with current and potential commercial customers. The COVID-19 pandemic is also placing a significant budgetary burden on federal, state and local governments, which may impede or delay their ability to purchase our products. The Company has evaluated subsequent events from the balance sheet date through March 29, 2021, 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. F- 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . None.