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





The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our condensed financial
statements and related notes.



Forward-Looking Statements



Some statements and information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations, notes to our
condensed financial statements and elsewhere in this report are not historical
facts but are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
within the meaning of the safe-harbor provisions of the U.S. Private Securities
Litigation Reform Act of 1995. Forward-looking statements can often be
identified by words such as: "expect," "believe," "estimate," "plan,"
"strategy," "future," "potential," "continue," "may," "should," "will," and
similar references to future periods. Examples include, among others, statements
about:



  ? The impacts and implications of the COVID-19 pandemic;


? Our commercialization and promotion strategy and plans, including key elements

to our business strategy, how we commercialize, our sales approach, the tools

we use, our hiring and retention strategy; our areas and markets of focus, our

pricing strategy, our strategic relationships and which geographic markets we


    target;



  ? The success and effectiveness of our products;


? Our seeking, obtaining or maintaining regulatory approvals for our product


    candidates;


? Our expectations regarding the potential market size for our products and how


    the market may develop;


? Our estimates or expectations related to our revenue, cash flow, expenses,

operating results, capital requirements and need for additional financing;

? Our ability, and the time required, to improve our cost structure and gross


    margins, and limit our cash burn;

  ? Our plans for our business, including for research and development;


? Our ability to enter into strategic arrangements and to achieve the expected


    results from such arrangements;



  ? The adequacy of our facilities to meet our current needs;



  ? The initiation, timing, progress and results of field studies and other
    studies and trials and our research and development programs;



  ? Our financial performance, including our ability to fund operations;


? Developments and projections relating to our projects, competitors and our


    industry, including legislative developments and impacts from those
    developments.




These forward-looking statements are not guarantees of future performance and
involve known and unknown risks, uncertainties and situations that are difficult
to predict and that may cause our own, or our industry's, actual results to be
materially different from the future results that are expressed or implied by
these statements. Accordingly, actual results may differ materially from those
anticipated or expressed in such statements as a result of a variety of factors,
including those discussed in Item 1A-"Risk Factors" of Part I of our Annual
Report on Form 10-K, for the year ended December 31, 2020, filed with the SEC on
March 29, 2021, and Item 1A of Part II of this Form 10-Q, in each case entitled
"Risk Factors," and those contained from time to time in our other filings with
the Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the date
made. Except as required by law, we undertake no obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise.



25






Overview



Since our inception, we have sustained significant operating losses in the
course of our research and development activities and commercialization efforts
and expect such losses to continue for the near future. We have generated
limited revenue to date from product sales, research grants and licensing fees
received under a former license. We have primarily funded our operations to date
through the sale of equity securities, including convertible preferred stock,
common stock and warrants to purchase common stock; and debt financing,
consisting primarily of convertible notes.



Through March 31, 2021, we have received net proceeds of $89.3 million from our
sales of common stock, preferred stock and warrant exercises and issuance of
convertible and other promissory notes, an aggregate of $1.7 million from
licensing fees and an aggregate of $1.0 million in net product sales. As of
March 31, 2021, we had an accumulated deficit of $106.1 million and cash and
cash equivalents of $15.2 million.



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 used the proceeds from the PPP Loan to retain employees, maintain payroll and make lease, interest and utility payments.





We have incurred significant operating losses every year since our inception.
Our net losses were $1.8 million and $2.7 million for the three months ended
March 31, 2021 and 2020, respectively. We expect to continue to incur
significant expenses and generate operating losses for at least the next 12
months.



We will need additional funding in order to continue to fund our operations and
achieve profitability and become cash flow positive and will continue to seek
additional financing. If such equity or debt financing is not available at
adequate levels or on acceptable terms, we may need to delay, limit or terminate
commercialization and development efforts or discontinue operations.



While it is difficult to measure the effect and impact of the COVID-19 pandemic
on revenue during the three months ended March 31, 2021, the travel and other
restrictions that started in March 2020 resulted in a significant slowdown in
our proof-of-concept field studies and sales efforts. While we were able to
resume field studies in some important projects by mid-year 2020 and initially
believed that we would re-start all our most significant field studies as we
obtained limited waivers of certain travel bans, we still have delays on certain
projects that might remain on hold until further lifting of government
restrictions. These continued delays could impact our results in future
quarters. Initially, we believed that pest control would continue through the
pandemic as a necessity and we were and have been able to maintain our
manufacturing with cautionary, best practices put in place. However, we have
concerns about distributor, pest control operator and individual consumer
spending as restrictive measures related to the pandemic continue. Extended stay
at home orders across the world have impeded our ability to communicate with
current and prospective customers, potentially reducing sales until the orders
are lifted. In addition, federal, state and municipal budgets continue to be
severely strained as a result of the pandemic. This may delay or impede their
ability to make near term purchases of our products. While we have stocked
certain long lead time inventory raw material ingredients, any prolonged impact
on the suppliers we rely on for the purchase of these items by the COVID-19
pandemic could impact future manufacturing operations.



Components of our Results of Operations





Sales



Sales are comprised primarily of sales, net of discounts and promotions, of
ContraPest and related components, to our distributors and customers, as well as
consulting and implementation services provided in conjunction with ContraPest
deployments.



Cost of Sales



Cost of sales consist primarily of cost of products sold, including scrap and
reserves for obsolescence. We continue to focus on improving our cost structure,
with the goals of shifting resources to commercialization, significantly
reducing our year-over-year burn rate and achieving a 50% or greater gross
margin. Steps have included relocating to more cost-efficient space,
organizational restructuring, and improving our manufacturing and supply
processes and reducing staffing. We expect to realize the benefits from these
steps in the coming quarters.



26






Operating Expenses


Research and Development Expenses

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

? Employee related expenses, including salaries, related benefits, travel and


    stock-based compensation expense for employees engaged in research and
    development functions;

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

  ? Facilities, depreciation and other expenses, which include direct and

allocated expenses for rent and maintenance of facilities, insurance and


    supplies.



We expense research and development costs as incurred.





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


Selling, General and Administrative Expenses


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



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



Interest Income


Interest income consists primarily of interest income earned on cash and cash equivalents.





Interest Expense



Interest expense consists primarily of interest accrued on our finance lease and note commitments.





Other Income (Expense), Net



Other income (expense), net, consists primarily of any recognized gains or
losses related to the sale of fixed assets. In 2021, other income also included
the reversal of a payroll benefits accrual from 2019 that was reversed as the
liability period had expired.



Income Taxes



Deferred tax assets and liabilities are determined based on differences between
the financial statement and tax basis of assets and liabilities, as well as a
consideration of net operating loss and credit carry forwards, using enacted tax
rates in effect for the period in which the differences are expected to impact
taxable income. A valuation allowance is established, when necessary, to reduce
deferred tax assets to the amount that is more likely than not to be realized.
The Company's effective tax rate for the three months ended March 31, 2021, as
well as for the year ended December 31, 2020, has been impacted by the full
valuation allowance on the Company's deferred tax assets.



27






Since our inception, we have not recorded any U.S. federal or state income tax
benefits for the net operating losses we have incurred in each year in our
history or for our generated research and development tax credits, due to the
uncertainty regarding our ability to realize a benefit from these tax
attributes. At March 31, 2021, the Company has federal and state net operating
loss carryforwards of approximately $69.5 million and $56.1 million,
respectively, not considering any potential IRC Section 382 annual limitation
discussed below. The federal loss carryforwards begin to expire in 2032, unless
previously utilized. Included in the $69.5 million of federal loss carryforwards
are approximately $25.1 million of net operating losses that do not expire due
to the tax law changes promulgated in conjunction with the Tax Cuts and Jobs Act
of 2017.



Additionally, the utilization of the net operating loss carryforwards are
subject to an annual limitation under Section 382 and 383 of the Internal
Revenue Code od 1986, and similar state tax provisions due to ownership change
limitations that have occurred previously or that could occur in the future.
These ownership changes limit the amount of net operating loss carryforwards and
other deferred tax assets that can be utilized to offset future taxable income
and tax, respectively. In general, an ownership change, as defined by Section
382 and 383 results from transactions increasing ownership of certain
stockholders or public groups in the stock of the corporation by more than 50
percent points over a three-year period. The Company has not conducted an
analysis of an ownership change under section 382. To the extent that a study is
completed and an ownership change is deemed to occur, the Company's net
operating losses could be limited.



Comparison of the Three Months Ended March 31, 2021 and 2020

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020:





                                                                  For the Three Months
                                                                     Ended March 31,
                                                                  2021            2020

Revenue:
Sales                                                          $        88     $        37
Cost of sales                                                           50              22
Gross profit                                                            38              15

Operating expenses:
Research and development                                               455             296

Selling, general and administrative                                  1,422 

         2,045
Total operating expenses                                             1,877           2,341

Net operating loss                                                  (1,839 )        (2,326 )

Other income (expense):
Interest income                                                          2               2
Interest expense                                                        (5 )            (8 )
Other income                                                            21              15
Total other income                                                      18               9

Net loss and comprehensive loss                                     (1,821

) (2,317 ) Deemed dividend-warrant price protection-revaluation adjustment

                                                               -             414
Net loss attributable to common shareholders                   $    (1,821

) $ (2,731 )



Weighted average common shares outstanding - basic and fully
diluted                                                          8,137,038 

1,611,304


Net loss per common share - basic and fully diluted            $     (0.22

)   $     (1.69 )




28






Sales



Sales, shown net of sales discounts and promotions, were $88,000 for the three
months ended March 31, 2021, compared to $37,000 for the same period in 2020.
Sales increased by $51,000 in the first three months of 2021 due, in part, to
our implementation of an internet sales capability, augmenting our existing pull
through sales strategy, where demand from the consumer market encourages, or
pulls, resellers and pest management professionals to offer our products, as
well as billings of $4,000 for customer product implementation services. These
initiatives have shown initial promise. However, we believe the benefit has been
offset by reduced sales, reflecting continued reduced spending by customers

due
to the COVID-19 pandemic.



Cost of Sales



Cost of sales was $50,000 or 56.8% of net sales for the three months ended March
31, 2021, compared to $22,000 or 59.5% of net sales for the three months ended
March 31, 2020. The increase in cost of goods sold of $28,000 in 2021 is
primarily due to higher sales volume. The decrease in cost of sales as a
percentage of net sales was primarily due to the impact of customer product
implementation billings. We continue to focus on manufacturing process
improvement and efficiencies. We anticipate cost of goods sold as a percentage
of sales will improve in the future due to manufacturing efficiencies as a
result of scale-up activities.



Gross Profit



Gross profit for the three months ended March 31, 2021 was $38,000 or 43.2% of
net sales, compared to a gross profit of $15,000 or 40.5% of net sales, for the
same period in 2020. The increase in gross profit was a direct result of the
impact of customer product implementation billings.



Research and Development Expenses





                                                             Three Months Ended
                                                                  March 31,                Increase
                                                            2021             2020         (Decrease)
                                                                        (in thousands)
Direct research and development expenses:
Personnel related (including stock-based compensation)   $      232       $

     137     $         95
Facility-related                                                 20               42              (22 )
Other                                                           203              117               86

Total research and development expenses                  $      455       $

     296     $        159
Research and development expenses were $455,000 for the three months ended March
31, 2021, compared to $296,000 for the same period in 2020. The $159,000
increase in research and development expenses was primarily due to an increase
of $95,000 in personnel-related costs, including stock-based compensation
expense, due to an increase in manufacturing and regulatory headcount to meet
current and future demand.



Facility-related expenses decreased $22,000 due primarily to the expiration of a
facility lease of 7,632 square feet of manufacturing space in Flagstaff, Arizona
at December 31, 2020.



The increase in other research and development expenses of $86,000 in the three
months ended March 31, 2021 compared to the same period in 2020 was primarily
due to increased expenses related to field and product improvement studies as
well as increased annual EPA and state registrations. We also continue to
develop our supply chain, particularly identifying and improving our sourcing of
key ingredients for our product candidates.



29





Selling, General and Administrative Expenses





Selling, general and administrative expenses were approximately $1.4 million for
the three months ended March 31, 2021, as compared to approximately $2.0 million
for the three months ended March 31, 2020. The decrease of $600,000 in selling,
general and administrative expenses was primarily due to a decrease of $142,000
in net salary costs, a decrease of $28,000 in travel expenses, a $350,000
decrease in professional service fees, a $71,000 decrease in transfer agent fees
and a $29,000 decrease in marketing expenses. The decrease in net salary costs
of $142,000 was due primarily to a decrease in administration headcount in March
2020 to control expenses. The decrease in professional services expenses was
primarily due to reduced legal expenses related to a litigation settlement
incurred in the three months ended March 31, 2020 that were not incurred in the
same period of 2021. The decrease in travel expenses was a direct result of
COVID-19 travel restrictions put in place at the end of March 2020. Likewise,
the pandemic continued to restrict access to trade shows and other marketing
activities in the three months ended March 31, 2021, resulting in lower
marketing expenses than the same period in 2020. The $71,000 decrease in
transfer agent fees in the three months ended March 31, 2021 over the same
period of 2020 was due to expenses related to a 20 for 1 reverse stock split
effected by the Company in February 2020.



Interest Income/Expense, Net





We recorded interest expense, net of $3,000 for the three months ended March 31,
2020, as compared to interest expense, net of $6 for the same period in 2020.
The $3,000 decrease in interest expense, net for the period was a result of
decreased interest expense on certain notes payable and finance leases that
expired after March 31, 2020.



Other Income (Expense)


Other income, net, was $21,000 for the three months ended March 31, 2021 as compared to $15,000 for the period ended March 31, 2020. The $21,000 of other income, net for the three months ended March 31, 2021 represented a payroll benefits accrual from 2019 that was reversed as the liability period had expired. The $15,000 other income, net for the period ended March 31, 2020 represented recognized gains on the sale of fixed assets during the period.

Liquidity and Capital Resources


Since our inception, we have sustained significant operating losses in the
course of our research and development activities and commercialization efforts
and expect such losses to continue for the near future. We have generated
limited revenue to date from product sales, research grants and licensing fees
received under a former license. We have primarily funded our operations to date
through the sale of equity securities, including convertible preferred stock,
common stock and warrants to purchase common stock; and debt financing,
consisting primarily of convertible notes.



Through March 31, 2021, we have received net proceeds of $89.3 million from our
sales of common stock, preferred stock and warrant exercises and issuance of
convertible and other promissory notes, an aggregate of $1.7 million from
licensing fees and an aggregate of $1.0 million in net product sales. As of
March 31, 2021, we had an accumulated deficit of $106.1 million and cash and
cash equivalents of $15.2 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 PPP of the Coronavirus Aid, Relief, and Economic Security Act.
We used the proceeds from the PPP Loan to retain employees, maintain payroll and
make lease, interest and utility payments.



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.



30






Based upon our current operating plan, we expect that cash and cash equivalents
at March 31, 2021, in combination with anticipated revenue and any additional
sales of our equity securities, will be sufficient to fund our current
operations for at least the next 12 months. We have evaluated and will continue
to evaluate our operating expenses and will concentrate our resources toward the
successful commercialization of ContraPest in the United States. However, if
anticipated revenue targets and margin targets are not achieved or expenses are
more than we have budgeted, we may need to raise additional financing before
that time. If we need more financing 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.



Additional Funding Requirements





We expect our expenses to continue or increase in connection with our ongoing
activities, particularly as we focus on marketing and sales of ContraPest.
Further, the COVID-19 pandemic will likely delay completion of field studies and
achievement of sales, which will further increase our need for financing. In
addition, we will continue to incur costs associated with operating as a public
company.



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

? Work to maximize market acceptance for, and generate sales of, our products;



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

? Continue the development of ContraPest and our other product candidates,

including engaging in any necessary field studies;

? Seek additional regulatory approvals for ContraPest and our other product

candidates;

? Scale up manufacturing processes and quantities to meet future demand of

ContraPest and any other product candidates for which we receive regulatory

approval;

? Continue product development of ContraPest and advance our research and

development activities and advance the research and development programs for


    other product candidates;

  ? Maintain, expand and protect our intellectual property portfolio;

? Add operational, financial and management information systems and personnel,

including personnel to support our product development and commercialization

efforts and operations as a public company; and

? Expand regulatory approvals for ContraPest, with an effort to make the product


    more user friendly and available for use in an increased number of
    applications.



We believe we will need additional financing to fund these continuing and additional expenses.





31






Cash Flows



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



                                                         Three Months Ended
                                                             March  31,
                                                          2021          2020
Cash used in operating activities                      $   (2,015 )   $ (1,871 )
Cash (used in) provided by investing activities               (63 )        

40


Cash provided by financing activities                      13,600        

1,387

Net increase (decrease) in cash and cash equivalents $ 11,522 $ (444 )






Operating Activities.



During the three months ended March 31, 2021, operating activities used $2.0
million of cash, primarily resulting from our net loss of $1.8 million and by
changes in our operating assets and liabilities of $424,000, offset by non-cash
charges of $228,000, consisting primarily of stock-based compensation,
depreciation and amortization. Our net loss was primarily attributable to
research and development activities and our selling, general and administrative
expenses, as we generated limited product revenue during the period. Net cash
used by changes in our operating assets and liabilities for the three months
ended March 31, 2021 of $424,000 consisted primarily of a net decrease in
accrued expenses and accounts payable of $283,000, an increase in prepaid
expenses of $182,000 and an increase in accounts receivable of 2,000, offset by
a decrease in inventory of $40,000 and a decrease in other assets of $3,000.



During the three months ended March 31, 2020, operating activities used $1.9
million of cash, primarily resulting from our net loss of $2.3 million offset by
changes in our operating assets and liabilities of $233,000 and by non-cash
charges of $213,000, consisting primarily of stock-based compensation,
depreciation and gains recognized on sale of equipment. Our net loss was
primarily attributable to research and development activities and our selling,
general and administrative expenses, as we generated limited product revenue
during the period. Net cash used by changes in our operating assets and
liabilities for the three months ended March 31, 2020 consisted primarily of a
net increase in prepaid expenses of $40,000 offset by a net decrease in accrued
expenses and accounts payable of $119,000, a decrease in accounts
receivable-trade and accounts receivable-other of $127,000, a decrease in other
assets of $9,000 and a decrease in inventory of $18,000.



Investing Activities.


For the three months ended March 31, 2021, net cash used in investing activities was $63,000 due to the purchases of property, plant and equipment and construction in progress.

For the three months ended March 31, 2020, we generated $40,000 in net cash related to investing activities as a result of sales of fixed assets.





Financing Activities.



During the three months ended March 31, 2021, net cash provided by financing
activities was $13.6 million as a result of $12.4 million in net proceeds from
the issuance of common stock and net proceeds of $1.2 million from the exercise
of warrants, offset by $17,000 of repayments related to notes payable and
$13,000 in repayments of finance lease obligations.



During the three months ended March 31, 2020, net cash provided by financing
activities was $1.4 million as a result of proceeds received from the issuance
of common stock of $1.4 million offset by $34,000 related to payments of finance
lease obligations and 14,000 of payments of notes payable.



32





Off-Balance Sheet Arrangements





None.


Critical Accounting Policies and Significant Judgments and Estimates


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



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



Revenue Recognition



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. For the
comparative periods, revenue has not been adjusted and continues to be reported
under ASC 605 - Revenue Recognition ("ASC 605"). Under ASC 605, revenue is
recognized when the following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) the performance of service has been rendered to a
customer or delivery has occurred; (3) the amount of the fee to be paid by a
customer is fixed and determinable; and (4) the collectability of the fee is
reasonably assured. The performance obligations identified by the Company under
ASC 606 are straightforward and similar to the unit of account and performance
obligation determination under ASC Topic 605, Revenue Recognition.



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.





Stock-Based Compensation



We recognize compensation costs related to stock options granted to employees
based on the estimated fair value of the awards on the date of grant, net of
estimated forfeitures, in accordance with ASC Topic 718 - Stock Compensation. We
estimate the grant date fair value of the awards, and the resulting stock-based
compensation expense, using the Black-Scholes option-pricing model. The grant
date fair value of stock-based awards is expensed on a straight-line basis over
the vesting period of the respective award.



We recorded stock-based compensation expense of approximately $155,000 and $151,000 for the three months ended March 31, 2021 and March 31, 2020, respectively. We expect to continue to grant stock options and other equity-based awards in the future and continue to recognize stock-based compensation expense in future periods.





33






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

Our
assumptions are as follows:


? Expected term. The expected term represents the period that the stock-based

awards are expected to be outstanding. Our historical share option exercise

experience does not provide a reasonable basis upon which to estimate an

expected term because of a lack of sufficient data. Therefore, we estimate the

expected term by using the simplified method, which calculates the expected

term as the average of the time-to-vesting and the contractual life of the

options.

? Expected volatility. Expected volatility is derived from the average

historical volatilities of publicly traded companies within our industry that

we consider to be comparable to our business over a period approximately equal

to the expected term. We intend to continue to consistently apply this process

using the same or similar public companies unless circumstances change such

that the identified companies are no longer similar to us, in which case, more

suitable companies whose share prices are publicly available would be utilized

in the calculation.

? Risk-free interest rate. The risk-free interest rate is based on the U.S.

Treasury yield in effect at the time of grant for zero coupon U.S. Treasury

notes with maturities approximately equal to the expected term.

? Expected dividend. The expected dividend is assumed to be zero as we have

never paid dividends and have no current plans to pay any dividends on our

common stock.

? Expected forfeitures. We use historical data to estimate pre-vesting option

forfeitures and record stock-based compensation expense only for those awards

that are expected to vest. To the extent actual forfeitures differ from the

estimates, the difference will be recorded as a cumulative adjustment in the


    period that the estimates are revised.



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





As noted above, we are required to estimate the fair value of the common stock
underlying our stock-based awards when performing the fair value calculations
using the Black-Scholes option-pricing model. In the absence of an active market
for our common stock, we utilized methodologies in accordance with the framework
of the American Institute of Certified Public Accountants' Technical Practice
Aid, Valuation of Privately-Held Company Equity Securities Issued as
Compensation, to estimate the fair value of our common stock. In addition, we
have conducted periodic assessments of the valuation of our common stock.



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



                                            Three Months Ended
                                                 March 31,
                                           2021            2020
Research and development                 $       2       $       3
Selling, general and administrative            153             148

Total stock-based compensation expense $ 155 $ 151

The intrinsic value of stock options outstanding as of March 31, 2021 was $0.





34

Emerging Growth Company Status





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

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