SenesTech, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is traded on the NASDAQ Capital Market under the symbol “SNES.” Our common stock was initially listed for trading on the NASDAQ Capital Market on December 8, 2016. Holders As of March 29, 2021, there were approximately 703 holders of record of our common stock. Because many shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to determine the total number of beneficial owners represented by these holders of record. Dividends We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant. Recent Sales of Unregistered Securities None. Purchases of Equity Securities by the Company We withhold shares of common stock in connection with the vesting of restricted stock units to satisfy required tax withholding obligations when they occur. There were no purchases of our equity securities during the twelve months ended December 31, 2020. Item 6. Selected Financial Data. Information for Item 6, Selected Financial Data, has been omitted pursuant to SEC modernization rules that are effective as of the filing date of this report. 23 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the sections of this report titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” 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 December 31, 2020, we had received net proceeds of $75.7 million from our sales of common stock, preferred stock and issuance of convertible and other promissory notes and an aggregate of $1.7 million from research grants and licensing fees and an aggregate of $0.9 million in product sales. At December 31, 2020, we had an accumulated deficit of $104.2 million and cash and cash equivalents of $3.6 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. In addition, 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. We have incurred significant operating losses every year since our inception. Our net losses were $8.4 million and $10.0 million for the years ended December 31, 2020 and 2019, respectively. We expect to continue to incur significant expenses and generate operating losses for at least the next 12 months. We have historically utilized, and intend to continue to utilize, various forms of stock-based awards in order to hire, retain and motivate talented employees, consultants and directors and encourage them to devote their best efforts to our business and financial success. In addition, we believe that our ability to grant stock-based awards is a valuable and necessary compensation tool that aligns the long-term financial interests of our employees, consultants and directors with the financial interests of our stockholders. As a result, a significant portion of our operating expenses includes stock-based compensation expense. Stock-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy. Specifically, our stock-based compensation expense for the year ended December 31, 2020 and December 31, 2019 was $0.6 million and $0.9 million, respectively, which represented 8.1% and 8.5%, respectively, of our total operating expenses for those periods. 24 Components of our Results of Operations Grant Revenue Grant revenue is comprised entirely of grant funding provided by the City of Phoenix, Arizona for jobs created in the City of Phoenix, Arizona during the year ended December 31, 2020. 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. 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. 25 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 recognized change in value of short-term investments, income (expense) related to the year-over-year fair market value adjustment of our derivative warrant and any recognized gains or losses related to the sale of fixed assets. 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 years ended December 31, 2020 and December 31, 2019 has been affected by the valuation allowance on the Company’s deferred tax assets. Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. 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 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 Years December 31, 2020 to 2019 The following table summarizes our results of operations for the years ended December 31, 2020 and 2019: 26 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 Revenue: 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 ) Grant Revenue Grant revenue for the year ended December 31, 2020 was $24,000 compared to $0 in 2019 as the grant was earned for jobs created in the City of Phoenix, Arizona during the 12 months ended December 31, 2020. Sales Sales, shown net of sales discounts and promotions, were $258,000 for the year ended December 31, 2020, compared to $143,000 for year ended December 31, 2019. Sales increased by $115,000 in 2020 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 $18,500 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. 27 Cost of Sales Cost of sales was $281,000 or 108.9% of net sales for the year ended December 31, 2020, compared to $101,000 or 70.6% of net sales for the year ended December 31, 2019. The increase in cost of goods sold of $180,000 in 2020 is primarily due to a reserve for obsolete product delivery system supplies of $119,000 and higher sales volume, offset by reduced scrap expense and continued process improvement and efficiencies. Without the reserve for delivery system supplies, cost of sales for the year ended December 31, 2020 would have been $162,000 or 62.8% of net sales, reflecting the impact of reduced scrap expense and continued 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 year ended December 31, 2020 was $1,000 or less than 1% of net sales, compared to a gross profit of $42,000 or 29.4% of net sales, for the year ended December 31, 2019. The decrease in gross profit was primarily due to a reserve for obsolete product delivery system supplies of $119,000. Gross profit for the year ended December 31, 2020 would have been $120,000 or 42.6% of net sales without this reserve, reflecting the impact of reduced scrap expense and continued process improvement and efficiencies., Research and Development Expenses Year Ended December 31, Increase 2020 2019 (Decrease) (in thousands) Direct research and development expenses: Personnel related (including stock-based compensation) $ 604 $ 807 $ (203 ) Facility related 167 261 (94 ) Other 723 840 (117 ) Total research and development expenses $ 1,494 $ 1,908 $ (414 ) Research and development expenses were $1.5 million for the year ended December 31, 2020, compared to $1.9 million for the year ended December 31, 2019. The $414,000 decrease in research and development expenses was primarily due to a decrease of $203,000 in personnel-related costs, including stock-based compensation expense, due to the classification of certain field support employees to sales and marketing, a decrease in facility related expenses of $94,000 and a decrease in other research and development expenses of $117,000. With our continued focus on commercialization of ContraPest, we determined that certain field support employees previously classified as research and development are now refocused on sales and marketing efforts and thus, reclassified as such. Facility-related expenses decreased $94,000 due primarily to the cancellation of a facility lease of 1,954 square feet of research and development space in Flagstaff, Arizona at December 31, 2019 and reduced allocation of facility expenses to research and development with the renewal of only a portion of the Flagstaff facilities in December 2019, offset by rent expense at the new manufacturing facility in Phoenix, Arizona, as discussed in Note 13 - Commitments and Contingencies. The year over year decrease in other research and development expenses of $117,000 was primarily due to increased consulting expenses related to certain product testing and development expenses offset by lower depreciation expense allocation due to sale of certain fixed assets and certain assets becoming fully depreciated during the year ended December 31, 2020, and a reclass of other expenses related to certain field support employees to sales and marketing as described above. We also continue to develop our supply chain, particularly identifying and improving our sourcing key ingredients for our product candidates. 28 Selling, General and Administrative Expenses Selling, general and administrative expenses were $6.4 million for the year ended December 31, 2020, compared to $8.4 million for the year ended December 31, 2019. The decrease of $2.0 million in selling, general and administrative expenses was primarily due to a reduction of $1.4 million in net salary costs, including stock compensation expenses, $309,000 reduction in travel related expenses, $190,000 reduction in professional services and a reduction in marketing costs of $150,000. Net salaries and wages were lower due primarily to a decrease in salaries and wages of $645,000 due to a provision for severance expense booked in December of 2019 for the termination of certain executive service contracts, a reduction of stock compensation expenses of $228,000 related to option grants fully vesting and resulting in lower stock compensation expense and the impact of temporary salary reductions by management to control expenses during the COVID-19 pandemic during 2020, offset by increased salaries and wages due to the reclassification of certain field support employees to sales and marketing, as noted above. The decrease in travel expenses of $309,000 for the year ended December 31, 2020, as compared to the same period in 2019, was a direct result of COVID-19 travel restrictions put in place in March 2020. The reduction in professional services expense was due to termination of an outside sales force contract, reduced utilization of field study consultants and lower Board of Director compensation expense as a result of voluntary reductions in compensation to control costs during the COVID-19 pandemic. In addition, the pandemic restricted access to trade shows and other marketing activities during the year ended December 31, 2020 resulting in lower marketing expenses than the same period in 2019. Interest Income/Expense Net We recorded $25,000 of interest expense, net for the year ended December 31, 2020, as opposed to interest income, net of $3,000 for the year ended December 31, 2019. The increase in interest expense, net of $28,000 was a result of decreased interest income as a result of significantly lower interest rates during the year ended December 31, 2020, offset by reduced interest expense as a result of finance leases and promissory notes that expired during the year ended December 31, 2020. Other Income (Expense), Net We recorded $21,000 of other income, net for the year ended December 31, 2020, compared to $266,000 of other income for the year ended December 31, 2019. The $245,000 net decrease in other income was primarily due to the reversal of a previously recorded litigation reserve of $269,000 in the year ended December 31, 2019, offset by higher income recognized for gains on sale of certain fixed assets during the year ended December 31, 2020. 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 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, and an aggregate of $1.7 million from licensing fees and an aggregate of $0.9 million from 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. 29 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. 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 ● Increase our expenses to 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 may need additional financing to fund these continuing and additional expenses. 30 Cash Flows The following table summarizes our sources and uses of cash for each of the years presented: Year Ended December 31, 2020 2019 Cash used in operating activities $ (7,108 ) $ (8,058 ) Cash used in investing activities (67 ) (71 ) Cash provided by financing activities 8,882 5,145 Net increase (decrease) in cash and cash equivalents $ 1,707 $ (2,984 ) Operating Activities . During the year ended December 31, 2020, operating activities used $7.1 million of cash, primarily resulting from our net loss of $7.9 million, changes in our operating assets and liabilities of $0.1 million offset by non-cash charges of $0.9 million. Our net loss was primarily attributed to research and development activities and our selling, general and administrative expenses, as we generated limited product sales and no research grant and licensing revenue during the year. Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2020 consisted primarily of a $524,000 decrease in accrued expenses and accounts payable offset by a decrease in prepaid expenses of $79,000, a decrease in inventories of $235,000 and a net increase in accounts receivable and other assets of $127,000. During the year ended December 31, 2019, operating activities used $8.1 million of cash, primarily resulting from our net loss of $10.0 million, changes in our operating assets and liabilities of $0.5 million and non-cash charges of $1.4 million. Our net loss was primarily attributed to research and development activities and our selling, general and administrative expenses, as we generated limited product sales and no research grant and licensing revenue during the year. Net cash used by changes in our operating assets and liabilities for the year ended December 31, 2019 consisted primarily of a $547,000 increase in accrued expenses and accounts payable, a decrease in prepaid expenses and deposits of $85,000 and a decrease in inventories of $81,000 offset by a decrease in deferred rent of $16,000 and a net increase in accounts receivable and deposits of $139,000. Investing Activities During the year ended December 31, 2020, we used $67,000 of cash in investing activities, which consisted of $114,000 for the purchases of property and equipment, offset by $47,000 of cash received on the sales of property and equipment. During the year ended December 31, 2019, we used $71,000 of cash in investing activities, which consisted entirely of the purchases of property and equipment. Financing Activities During the year ended December 31, 2020, net cash provided by financing activities was $8.9 million as a result of $5.7 million in net proceeds from the issuance of common stock, $2.6 million in proceeds from warrant exercises and $646,000 from the issuance of notes payable, partially offset by $135,000 of repayments related to notes payable and finance lease obligations. During the year ended December 31, 2019, net cash provided by financing activities was $5.1 million as a result of $3.6 million in net proceeds from the issuance of common stock, $1.8 million in proceeds from warrant exercises, partially offset by $220,000 of repayments related to notes payable and $55,000 of payments for employee withholding taxes related to share-based awards. 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 1 — Summary of Significant Accounting Policies to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements. 31 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 $645,000 and $873,000 for the years ended December 31, 2020 and 2019, respectively. We expect to continue to grant stock options and other equity-based awards, such as restricted stock units, in the future and to continue to recognize stock-based compensation expense in future periods. 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. 32 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. 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: Years Ended December 31, 2020 2019 (in thousands) Selling, general and administrative expenses $ 636 $ 859 Research and development expense 9 14 Total stock-based compensation expense $ 645 $ 873 The intrinsic value of stock options outstanding as of December 31, 2020 is $0. Emerging Growth Company Status The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we intend to comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies. Off-Balance Sheet Arrangements None. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Not applicable. 33