SenesTech, Inc. 10-Q

Item 1. Financial Statements SENESTECH, INC. CONDENSED BALANCE SHEETS (In thousands, except shares and per share data) March 31, December 31, 2021 2020 (Unaudited) ASSETS Current assets: Cash $ 15,165 $ 3,643 Accounts receivable trade, net 27 25 Prepaid expenses 360 178 Inventory 905 945 Deposits 26 28 Total current assets 16,483 4,819 Right to use asset-operating leases 627 665 Property and equipment, net 528 538 Total assets $ 17,638 $ 6,022 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Short-term debt $ 79 $ 98 Accounts payable 175 404 Accrued expenses 238 292 Total current liabilities 492 794 Long-term debt, net 662 673 Operating lease liability 636 671 Total liabilities 1,790 2,138 Commitments and contingencies (See note 12) - - Stockholders’ equity: Common stock, $0.001 par value, 100,000,000 shares authorized, 12,164,046 and 5,099,512 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively 12 5 Additional paid-in capital 121,897 108,119 Accumulated deficit (106,061 ) (104,240 ) Total stockholders’ equity 15,848 3,884 Total liabilities and stockholders’ equity $ 17,638 $ 6,022 See accompanying notes to financial statements. 1 SENESTECH, INC. CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except shares and per share data) (Unaudited) For the Three Months Ended March 31, 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 ) See accompanying notes to financial statements. 2 SENESTECH, INC. CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (In thousands, except shares and per share data) (Unaudited) For The Three Months Ended March 31, 2020 and 2021 Common Stock Additional Paid-In Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity (Deficit) Balance, December 31, 2019 1,414,671 $ 1 $ 98,433 $ (95,867 ) $ 2,567 Stock based compensation - - 151 - 151 Issuance of common stock, sold for cash, net 353,872 1 1,707 - 1,708 Issuance of common stock upon exercise of warrants 51,414 - 238 - 238 Issuance costs of common stock issuances (273 ) (273 ) Issuance of common stock for fractional shares-20-1 reverse split 24 - - - - Warrant antidilution price protection adjustment 414 414 Net loss for the three months ended March 31, 2020 - - - (2,731 ) (2,731 ) Balance, March 31, 2020 1,819,981 $ 2 $ 100,670 $ (98,598 ) $ 2,074 Balance, December 31, 2020 5,099,512 $ 5 $ 108,119 $ (104,240 ) $ 3,884 Stock based compensation - - 155 - 155 Issuance of common stock, sold for cash, net 6,163,854 6 12,586 - 12,592 Issuance of common stock upon exercise of warrants 900,680 1 1,208 - 1,209 Issuance costs of common stock issuances (171 ) (171 ) Net loss for the three months ended March 31, 2021 - - - (1,821 ) (1,821 ) Balance, March 31, 2021 12,164,046 $ 12 $ 121,897 $ (106,061 ) $ 15,848 See accompanying notes to financial statements. 3 SENESTECH, INC. CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) For the Three Months Ended March 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,821 ) $ (2,317 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 73 77 Stock-based compensation 155 151 Gain on sale of equipment - (15 ) (Increase) decrease in current assets: Accounts receivable - trade (2 ) 4 Accounts receivable - other - 123 Other assets 5 9 Prepaid expenses (182 ) (40 ) Inventory 40 18 Increase (decrease) in current liabilities: Accounts payable (229 ) 474 Accrued expenses (54 ) (355 ) Net cash used in operating activities (2,015 ) (1,871 ) CASH FLOWS FROM INVESTING ACTIVITIES Cash received on sale of property and equipment - 40 Purchase of property and equipment (63 ) - Net cash provided by (used in) investing activities (63 ) 40 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of common stock, net 12,421 1,435 Repayments of notes payable (17 ) (14 ) Repayments of finance lease obligations (13 ) (34 ) Proceeds from the exercise of warrants 1,209 - Net cash provided by financing activities 13,600 1,387 NET CHANGE IN CASH 11,522 (444 ) CASH AT BEGINNING OF PERIOD 3,643 1,936 CASH AT END OF PERIOD $ 15,165 $ 1,492 SUPPLEMENTAL INFORMATION: Interest paid $ 5 $ 8 Income taxes paid $ - $ - NON-CASH INVESTING AND FINANCING ACTIVITIES: Forgiveness of accrual in warrant exercise - $ 238 Deemed dividend - $ 414 See accompanying notes to financial statements. 4 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) (Unaudited) Note 1 - Organization and Description of Business SenesTech, Inc. (referred to in this report as “SenesTech,” the “Company,” “we” or “us”) has developed and is 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 results in a sustained reduction of the rat population. Rats have plagued humanity throughout history. They pose significant threats to the environment and to the health and food security of many communities. In addition, rodents cause extensive 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 an effective, 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, 48 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 to broaden the marketability and use of 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. We were 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 and manufacturing site are in Phoenix, Arizona. On December 8, 2016, we went public and are currently traded on Nasdaq under the symbol SNES. 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. 5 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 1 - Organization and Description of Business – (continued) Going Concern Our financial statements as of March 31, 2021, December 31, 2020 and March 31, 2020 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm included in its opinion for the years ended December 31, 2020 and 2019 an explanatory paragraph referring to our net loss from operations and net capital deficiency and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. If we encounter continued issues or delays in the commercialization of ContraPest, our prior losses and expected future losses could have an adverse effect on our financial condition and negatively impact our ability to fund continued operations, obtain additional financing in the future and continue as a going concern. There are no assurances that such financing, if necessary, will be available to us at all or will be available in sufficient amounts or on reasonable terms. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we are unable to generate additional funds in the future through additional financings, sales of our products, licensing fees, royalty payments or from other sources or transactions, we will exhaust our resources and will be unable to continue operations. Liquidity and Capital Resources 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. We have primarily funded our operations to date through the sale of equity securities, including convertible preferred stock, common stock and warrants to purchase common stock. See Note 10 for a description of our public equity sales. We have also raised capital through debt financing, consisting primarily of convertible notes and government loan programs, and, to a lesser extent, payments received in connection with product sales, research grants and licensing fees. Through March 31, 2021, we 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. 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 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. Basis of Presentation The accompanying unaudited condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the Company’s opinion, the unaudited condensed financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly the Company’s financial position as of March 31, 2021, the Company’s operating results for the three months ended March 31, 2021 and 2020, and the Company’s cash flows for the three months ended March 31, 2021 and 2020. The accompanying financial information as of December 31, 2020 is derived from audited financial statements. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 29, 2021. All amounts shown in these financial statements and accompanying notes are in thousands, except percentages and per share and share amounts. 6 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 2 - Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and classification of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The significant estimates in the Company’s financial statements include the valuation of preferred stock, if issued, common stock and related warrants, and other stock-based awards. Actual results could differ from such estimates. Reclassifications Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no material impact on net earnings, financial position or cash flows. 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 $7,000 and $1,500 at March 31, 2021 and December 31, 2020, 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 at March 31, 2021 and December 31, 2020. Inventories Inventories are stated at the lower of cost or market value, using the first-in, first-out convention. Inventories consist of raw materials, work in progress and finished goods. Raw materials are stocked to reduce the risk of impact on manufacturing for potential supply interruptions due to the COVID-19 pandemic or long lead times on certain ingredients. Components of inventory are: March 31, December 31, 2021 2020 Raw materials $ 935 $ 950 Work in progress 4 24 Finished goods 89 94 Total inventory 1,028 1,068 Less: Reserve for obsolete (123 ) (123 ) Total net inventory $ 905 $ 945 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. 7 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 2 - Summary of Significant Accounting Policies – (continued) Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Equipment held under 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 is amortized over the shorter of the lease term or estimated useful life of the asset. The Company incurs repair and maintenance costs on its major equipment, which are expensed as incurred. Impairment of Long-Lived Assets Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require long-lived assets or asset groups to be tested for possible impairment, the Company compares the undiscounted cash flows expected to be generated from the use of the asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques, such as discounted cash flow models and the use of third-party independent appraisals. The Company has not recorded an impairment of long-lived assets since its inception. Revenue Recognition Effective January 1, 2018, the Company adopted 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 stock options and restricted stock units 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 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. 8 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 2 - Summary of Significant Accounting Policies – (continued) The stock-based compensation expense recorded for the three months ended March 31, 2021 and 2020, 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 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 March 31, 2021 or December 31, 2020 and as such, no interest or penalties were recorded in income tax expense. Comprehensive Loss Net loss and comprehensive loss were the same for all periods presented; therefore, a separate statement of comprehensive loss is not included in the accompanying financial statements. Loss Per Share Attributable to Common Stockholders Basic loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share attributable to common stockholders is computed by dividing the loss attributable to common stockholders by the weighted average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury stock and if-converted methods. For purposes of the computation of diluted loss per share attributable to common stockholders, common stock purchase warrants, and common stock options are considered to be potentially dilutive securities but have been excluded from the calculation of diluted loss per share attributable to common stockholders because their effect would be anti-dilutive given the net loss reported for the three months ended March 31, 2021 and 2020. Therefore, basic and diluted loss per share attributable to common stockholders are the same for each period presented. 9 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 2 - Summary of Significant Accounting Policies – (continued) The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted loss per share attributable to common stockholders (in common stock equivalent shares): March 31, 2021 2020 Common stock purchase warrants 4,553,733 812,963 Restricted stock units 31,405 5,877 Common stock options 506,852 136,239 Total 5,091,990 955,079 Adoption of New Accounting Standard: In August 2018, the FASB issued ASU 2018-15 Accounting for Implementation Costs Related to Cloud Computing or Hosting Arrangements, authoritative guidance intended to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires presentation of the capitalized implementation costs in the statement of financial position and in the statement of cash flows in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented, and the expense related to the capitalized implementation costs to be presented in the same line item in the statement of operations as the fees associated with the hosting element (service) of the arrangement. This guidance was effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. Effective January 1, 2020, the Company adopted the guidance and determined there was no applicability to the Company at this time and as such, there was no impact on our financial position, results of operations, or cash flows. Other than the item noted above, there have been no new accounting pronouncements not yet effective or adopted in the current year that we believe have a significant impact, or potential significant impact, to our unaudited condensed interim financial statements. Note 3 - Fair Value Measurements The Company issued common stock warrants to purchase shares of common stock in June of 2015 (see Note 9 - 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. 10 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 3 - Fair Value Measurements – (continued) 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: 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 are classified as Level 3 because there is 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. Note 4 - Credit Risk The Company is potentially subject to concentrations of credit risk in its accounts receivable. Credit risk with respect to receivables is limited due to the number of companies comprising the Company’s customer base, 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 March 31, 2021 or December 31, 2020 and therefore, did not record a reserve for uncollectable accounts at March 31, 2021 or December 31, 2020. The Company does not require collateral or other securities to support its accounts receivable. 11 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 5 - Prepaid Expenses Prepaid expenses consist of the following: March 31, December 31, 2021 2020 Director, officer and other insurance $ 181 $ 18 NASDAQ fees 33 - Legal retainer 25 25 Marketing programs and conferences 73 106 Professional services retainer 12 8 Rent 18 18 Engineering, software licenses and other 18 3 Total prepaid expenses $ 360 $ 178 Note 6 - Property and Equipment Property and equipment, net consist of the following: Useful March 31, December 31, Life 2021 2020 Research and development equipment 5 years $ 1,420 $ 1,397 Office and computer equipment (1) 3 years 749 733 Autos 5 years 54 54 Furniture and fixtures 7 years 41 41 Leasehold improvements * 102 283 Construction in progress 36 115 2,402 2,623 Less accumulated depreciation and amortization (1,874 ) (2,085 ) Total $ 528 $ 538 * Shorter of lease term or estimated useful life (1) In the three months ended March 31, 2021, the Company received net proceeds of less than $1 in the sale of research and development equipment resulting in gains on the sale of these assets of less than $1. In the three months ended March 31, 2020, the Company received net proceeds of $40 in the sale of research and development equipment and office and computer equipment, resulting in a gain on the sale of these assets of $15. Depreciation and amortization expense was approximately $73 and $77 for the three months ended March 31, 2021 and 2020, respectively. Note 7 - Accrued Expenses Accrued expenses consist of the following: March 31, December 31, 2021 2020 Compensation and related benefits $ 209 $ 218 Board Compensation 5 3 Personal property and franchise tax 8 57 Other 16 14 Total accrued expenses $ 238 $ 292 12 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 8 - Borrowings A summary of the Company’s borrowings, including finance lease obligations, is as follows: March 31, December 31, 2021 2020 Short-term debt: Current portion of long-term debt 79 98 Total short-term debt $ 79 $ 98 Long-term debt: Finance lease obligations $ 66 $ 79 Other promissory notes 675 692 Total 741 771 Less: current portion of long-term debt (79 ) (98 ) Total long-term debt $ 662 $ 673 Finance Lease Obligations Finance lease obligations at March 31, 2021 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. The Company applied for forgiveness in February 2021. We cannot guarantee that the PPP loan will be forgiven. 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. 13 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 9 - Common Stock Warrants and Common Stock Warrant Liability The table summarizes the common stock warrant activity as of March 31, 2021 as follows: Term Exercise Balance Balance Balance Issue Date Warrant Type Date Price December 31, 2019 Issued Exercised Expired December 31, 2020 Issued Exercised Expired March 31, 2021 2016 and prior Various Various-2020/2021 Various 17,059 - (9,375 ) (7,684 ) - - - - - November 21,2017 Common Stock Offering Warrants November 21, 2022 $ 1.3659 (1) 143,501 - - 143,501 - - - 143,501 November 21,2017 Dealer Manager Warrants November 21, 2022 $ 30.00 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 $ 23.00 202,943 - - - 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 - - - 177,500 January 28,2020 Dealer Manager Warrants July 28,2025 $ 10.00 - 13,315 - - 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 - - - 13,228 April 21,2020 Dealer Manager Warrants April 21,2025 $ 3.97 - 118,073 - - 118,073 - - - 118,073 April 24,2020 Registered Direct Offering April 24,2025 $ 3.05 - 1,574,308 (1,524,308 ) - 50,000 - - - 50,000 October 26, 2020 Private Warrant Inducement April 27,2026 $ 1.73 - 1,700,680 1,700,680 - (700,680 ) - 1,000,000 October 26, 2020 Dealer Manager Warrants April 27,2026 $ 2.16 - 85,034 85,034 - - - 85,034 February 2, 2021 Private Placement Agreement August 2,2026 $ 2.216 - - - - - 2,194,427 2,194,427 February 2, 2021 Dealer Manager Warrants August 2,2026 $ 2.848 - - - - - 329,164 329,164 March 23, 2021 Dealer Manager Warrants March 23, 2026 $ 2.50 - - - - - 148,125 148,125 489,176 2,582,697 4,553,733 (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. 14 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 9 - Common Stock Warrants and Common Stock Warrant Liability – (continued) Outstanding Warrants As of March 31, 2021, we had 4,553,733 shares of common stock issuable upon exercise of outstanding common stock warrants, at a weighted-average exercise price of $3.98603 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%. 15 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 9 - Common Stock Warrants and Common Stock Warrant Liability – (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%. 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 of 1933, as amended (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. 16 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 9 - Common Stock Warrants and Common Stock Warrant Liability – (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 (as defined in the 2020 Warrants), 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. 17 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 9 - Common Stock Warrants and Common Stock Warrant Liability – (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 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 (the “Original 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%. 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%. 18 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 9 - Common Stock Warrants and Common Stock Warrant Liability – (continued) Common Stock Warrants Issued in February 2021 Private Placement Agreement In February 2021, in connection with a private placement agreement with certain institutional and accredited investors, the Company issued common stock warrants to purchase up to an aggregate of 2,194,427 shares of common stock at an exercise price of $2.216 per share. The warrants were exercisable immediately and have an exercise period of five and one-half years from the date of issuance. The warrant holder may not exercise any portion of such holder’s 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. The Company estimated the fair value of the common stock warrants, exercisable at $2.216 per share, to be $3,052 using a Black Scholes model based on the following significant inputs: common stock price of $1.93; comparable company volatility of 95.6%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.18%. Common Stock Warrants Issued to Placement Agent in February 2021 Private Placement Agreement In connection with the private placement in February 2021, the Company issued to H.C. Wainwright & Co., LLC, as placement agent, warrants to purchase up to 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. The Company estimated the fair value of these common stock warrants, with an exercise price of $2.8481 per share, to be $435 using a Black Scholes model based on the following significant inputs: common stock price of $1.93; comparable company volatility of 95.6%; remaining term 5.5 years; dividend yield of 0% and risk-free interest rate of 0.18%. Common Stock Warrants Issued to Placement Agent in March 2021 Registered Direct Offering 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 on Form S-3 (File No. 333-225712). In connection with the registered direct offering in March 2021, the Company issued to H.C. Wainwright & Co., LLC, as the placement agent, warrants to purchase up to 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. The Company estimated the fair value of these common stock warrants, with an exercise price of $2.50 per share, to be $181 using a Black Scholes model based on the following significant inputs: common stock price of $1.76; comparable company volatility of 100.8%; remaining term 5 years; dividend yield of 0% and risk-free interest rate of 0.31%. Deemed Dividend Adjustment-Warrant Modified Terms Revaluation 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 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%. 19 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 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 12,164,046 and 5,099,512 shares of common stock issued and outstanding as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021, the Company issued 7,064,534 shares of common stock as follows: ● an aggregate of 4,388,854 shares in connection with a private placement offering and exercise of pre-funded warrants issued in connection with the offering, generating net proceeds to the Company in February 2021 of approximately $8,898, as further described below; ● an aggregate of 1,975,000 shares in connection with a registered direct offering generating net proceeds to the Company in March 2021 of approximately $3,523, as further described below; and ● an aggregate of 700,680 shares in connection with the exercise of common stock warrants, generating net proceeds to the Company in March 2020 of approximately $1,209, as further described below. Public Offerings and Registered Direct Offerings 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. At March 29, 2021, all 420,000 pre-funded shares had been distributed. In connection with the offering, we issued the placement agent warrants to purchase up to 329,164 shares of Common Stock with an exercise price of $2.8481 per share. 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, 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 on Form S-3 (File No. 333-225712). In connection with the offering, we issued the placement agent warrants to purchase up to 148,125 shares of Common Stock at an exercise price per share of $2.50 per share. 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. 20 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 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 March 31, 2021, the Company had 419,061 shares of common stock available for issuance under the 2018 Plan. 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 during 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 three months ended March 31, 2021 were as follows: Expected volatility 96.2 % Expected dividend yield — Expected term (in years) 5 Risk-free interest rate 0.26 % 21 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 11 - Stock-based Compensation – (continued) The weighted average grant date fair value of options granted during the three months ended March 31, 2021 was $1.94 per share, as per the table above. 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. The following table summarizes the stock option activity, for both equity 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, 2020 496,471 $ 8.63 3.9 $ — Granted 12,756 $ 1.84 4.8 $ — Exercised — $ — — $ — Forfeited (2,375 ) $ — — $ — Expired — $ — — $ — Outstanding at March 31, 2021 506,852 $ 8.15 2.3 $ — Exercisable at March 31, 2021 228,481 $ 14.45 2.1 $ — (1) The aggregate intrinsic value in the table was calculated based on the difference between the estimated fair market value of the Company’s stock and the exercise price of the underlying options. The estimated stock values used in the calculation were $1.73 and $1.66 per share for the year ended December 31, 2020 and the three months ended March 31, 2021, respectively. Restricted Stock Units The following table summarizes restricted stock unit activity for the three months ended March 31, 2021: Number of Units Weighted Average Grant-Date Fair Value Per Unit Outstanding as of December 31, 2020 32,072 $ 4.05 Granted — $ — Vested (667 ) $ 1.80 Forfeited — $ — Outstanding as of March 31, 2021 31,405 $ 2.58 22 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 11 - Stock-based Compensation – (continued) The stock-based compensation expense was recorded 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 allocation between research and development and selling, general and administrative expense was based on the department and services performed by the employee or non-employee. At March 31, 2021, the total compensation cost related to restricted stock units and unvested options not yet recognized was $629, which will be recognized over a weighted average period of 34 months, assuming the employees and non-employee s complete their service period required for vesting. Note 12 - 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 In February 2012, the Company entered into an operating lease for its then corporate headquarters in Flagstaff, Arizona, which expired in December 2019. In December 2019, we extended the lease for only the manufacturing facilities located in Flagstaff, Arizona, occupying a total of 7,632 square feet of space. The lease for these 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. 23 SENESTECH, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (In thousands, except share and per share data) Note 12 - Commitments and Contingencies – (continued) Rent expense was $54 and $69 for the three months ended March 31, 2021 and 2020, respectively. The future minimum lease payments under non-cancellable operating lease and future minimum finance lease payments as of March 31, 2021 are follows: Years Ending December 31, Finance Leases Operating Lease 2021 43 142 2022 28 194 2023 - 198 2024 - 186 Total minimum lease payments $ 71 $ 720 Finance Leases Less: amounts representing interest (ranging from 11.43% to 14.68%) $ 5 Present value of minimum lease payments 66 Less: current installments under finance lease obligations 52 Total long-term portion $ 14 Note 13 - Subsequent Events [Share Issuances for Services On April 8, 2021, the Company issued 667 shares of common stock for service for restricted stock units that vested on that date. On April 29, 2021, the Company net issued 20,284 shares of common stock for service for the net settlement of restricted stock units that vested on that date. The shares of common stock withheld were used to satisfy required withholding tax liability in connection with the vesting of shares.] 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 mid-year 2020, however, we still have delays on certain projects that might remain on hold until certain government restrictions are lifted. These continued delays have impacted our results of operations and could impact our results in future quarters. In addition, extended 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 May 14, 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. 24 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations As used in this Quarterly Report on Form 10-Q, “SenesTech,” the “Company,” “we,” “us,” or “our” 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.