SenesTech, Inc. 10-Q

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 of 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 products and 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 to, and the expected benefits of, improving our cost structure and gross margins, and limiting 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; and ● 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, 27 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. 27 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, 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 September 30, 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 $1.4 million in net product sales. As of September 30, 2021, we had an accumulated deficit of $110.0 million and cash and cash equivalents of $11.1 million. On June 18, 2021, the Company received notification from BMO Harris Bank National Association as the lender in a promissory note pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), that a loan to the Company under this program in the amount of $645,700 was forgiven in full under the terms of the program. This loan was originally granted and funded on April 15, 2020. We have incurred significant operating losses every year since our inception. Our net losses were $2.3 million and $1.9 million for the three months ended September 30, 2021 and 2020, respectively, and $5.8 million and $6.3 million for the nine months ended September 30, 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 nine months ended September 30, 2021 and September 30, 2020, 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 certain businesses and government entities return to more normal operations. Continued delays or new restrictions on travel or operations as a result of new outbreaks and variants could impact our results in future quarters. Initially, we believed that pest control would continue through the COVID-19 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 COVID-19 pandemic continue. Extended stay at home orders across the world, whether imposed by governments or individual businesses, 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 COVID-19 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. 28 Components of our Results of Operations Grant Revenue Grant revenue is comprised entirely of grant funding provided by the City of Phoenix, Arizona for jobs created and new employee training in the City of Phoenix, Arizona during the calendar year 2021. 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, improving our manufacturing and supply processes and reducing staffing. We expect to realize the benefits from these steps in the coming quarters. Operating Expenses Research and Development Expenses Research and development expenses consist primarily of costs incurred in connection with the research and development of ContraPest and our other product candidates, which costs include: ● Employee related expenses, including salaries, related benefits, travel and stock-based compensation expense for employees engaged in research and development functions; ● Expenses incurred in connection with the development of our product candidates [including related regulatory and production expenses]; 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. 29 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 nine months ended September 30, 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. The Company has not recorded any U.S. federal or state income tax benefits for our net operating losses incurred since inception or for our research and development tax credits generated to date, due to the uncertainty regarding our ability to realize a benefit from these tax attributes in the future. Based on tax return activity through December 31, 2020, the Company has federal and state net operating loss carryforwards of approximately $69.1 million and $55.7 million, respectively, not considering any potential Internal Revenue Code of 1986 (“IRC”) Section 382 annual limitation discussed below. The Company is accruing additional net operating losses in calendar year 2021, which will be added to the carryover net operating loss balance once the current year is completed. The federal loss carryforwards begin to expire in 2029, unless previously utilized. The state loss carryforwards begin to expire in 2032, unless previously utilized. Included in the $69.1 million of federal loss carryforwards are approximately $24.7 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. During the quarter ended June 30, 2021, the Company received notification that a loan to the Company under the Paycheck Protection Program (the “PPP”) in the amount of approximately $646 thousand was forgiven in full pursuant to the PPP program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Section 1106(i) of the CARES Act specifically requires taxpayers to exclude canceled indebtedness from PPP loans from gross income, and accordingly, the debt forgiveness amount is nontaxable to the Company. Subsequent to the passage of the CARES Act, the IRS issued Notice 2020-32, which precludes a deduction for an expense that would otherwise be deductible if the payment results in the forgiveness of a loan, thereby preventing entities from claiming a double tax benefit on the qualifying expenses for PPP loans. On December 27, 2020, the Consolidated Appropriations Act (“CAA”) was signed into law, which reverses existing IRS guidance provided in Notice 2020-32 by allowing taxpayers to fully deduct any business expenses, regardless of whether the expense was paid for using forgiven PPP loan proceeds. None of the other provisions of the CARES Act or CAA had a material impact to the Company’s tax accounts. 30 Comparison of the Three Months Ended September 30, 2021 and 2020 The following table summarizes our results of operations for the three and nine months ended September 30, 2021 and 2020: For the Three Months For the Nine Months Ended September 30, Ended September 30, 2021 2020 2021 2020 Revenue: Grant revenue $ 24 $ - $ 24 $ - Sales 159 77 407 185 Total revenue 183 77 431 185 Cost of sales 106 41 275 106 Gross profit 77 36 156 79 Operating expenses: Research and development 514 380 1,424 902 Selling, general and administrative 1,816 1,568 5,173 5,040 Total operating expenses 2,330 1,948 6,597 5,942 Net operating loss (2,253 ) (1,912 ) (6,441 ) (5,863 ) Other income (expense): Interest income 2 - 5 2 Interest expense (2 ) (7 ) (10 ) (22 ) Payroll Protection Program loan forgiveness - - 650 - Other income - - 22 18 Total other income - (7 ) 667 (2 ) Net loss and comprehensive loss (2,253 ) (1,919 ) (5,774 ) (5,865 ) Deemed dividend-warrant price protection-revaluation adjustment - - - 414 Net loss attributable to common shareholders $ (2,253 ) $ (1,919 ) $ (5,774 ) $ (6,279 ) Weighted average common shares outstanding - basic and fully diluted 12,190,257 3,398,832 10,850,197 2,593,288 Net loss per common share - basic and fully diluted $ (0.18 ) $ (0.56 ) $ (0.53 ) $ (2.42 ) Grant Revenue Grant revenue for the three months ended September 30, 2021 was $24,000 compared to $0 in the same period of 2020 and was granted for jobs created and related new employee training in the City of Phoenix, Arizona during the three months ended September 30, 2021. Sales Sales, shown net of sales discounts and promotions, were $159,000 for the three months ended September 30, 2021, compared to $77,000 for the same period in 2020. Sales increased by $82,000 in the three months ended September 30, 2021 due, in part, to the continued focus on of our internet sales initiatives, 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 enhanced strategic partnerships and collaborations with key distributors and PMPs. While these initiatives continue to progress, we believe the benefits of these initiatives continue to be impacted by reduced spending by customers due to the COVID-19 pandemic. 31 Cost of Sales Cost of sales was $106,000 or 66.7% of sales, exclusive of grant revenue, for the three months ended September 30, 2021, compared to $41,000 or 53.2% of sales, exclusive of grant revenue, for the three months ended September 30, 2020. The increase in cost of sales of $65,000 in the three months ended September 30, 2021 is primarily due to higher sales volume as well as the impact of increases in manufacturing scrap associated with manufacturing scale up activities during 2021. The increase in cost of sales as a percentage of sales was primarily due to the impact of increased new customer sales incentives during the quarter ended September 30, 2021 and increases in manufacturing scrap associated with manufacturing scale up activities during 2021 as noted above. We continue to focus on manufacturing process improvement and efficiencies and anticipate cost of sales 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 September 30, 2021 was $77,000 or 42.1% of total revenue, compared to a gross profit of $36,000 or 46.8% of total revenue, for the same period in 2020. The increase in gross profit of $41,000 for the three months ended September 30, 2021 as compared to the same period in 2020 was primarily due to the impact of increased sales volume and the receipt of $24,000 of training grant revenues in the period. The decrease in gross profit as a % of net sales was a direct result of the impact of increased new customer sales incentives during the quarter ended September 30, 2021 as well as the impact of increases in manufacturing scrap associated with manufacturing scale up activities during 2021 noted above. Research and Development Expenses Three Months Ended September 30, Increase 2021 2020 (Decrease) (in thousands) Direct research and development expenses: Personnel related (including stock-based compensation) $ 177 $ 191 $ 14 Professional fees 92 106 14 Facility-related 26 46 20 Other 219 37 (182 ) Total research and development expenses $ 514 $ 380 $ 134 Research and development expenses were $514,000 for the three months ended September 30, 2021, compared to $380,000 for the same period in 2020. The $134,000 increase in research and development expenses was primarily due to an increase of $182,000 in other research and development costs, offset by a decrease in facility related expenses of $20,000, a decrease in professional fees of $14,000 and a decrease in personnel related expenses of $14,000. Facility-related expenses decreased $20,000 for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, due primarily to the expiration of a facility lease of 7,632 square feet of manufacturing space in Flagstaff, Arizona at December 31, 2020. Personnel related expenses decreased $14,000 in the three months ended September 30, 2021 compared to the same period in 2020 due primarily to delays in hiring as a result of employee turnover. Professional fees decreased $14,000 in the three months ended September 30, 2021 compared to the same period in 2020 due primarily to a decrease in regulatory legal expenses. The increase in other research and development expenses of $182,000 in the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to increased shipping expenses due to higher sales volume and field and regulatory compliance studies. We also continue to incur expenses in improving our manufacturing process and formulation. 32 Selling, General and Administrative Expenses Three Months Ended September 30, Increase 2021 2020 (Decrease) (in thousands) Direct selling, general and administrative expenses: Personnel related (including stock-based compensation) $ 995 $ 809 $ (186 ) Professional fees 335 250 (85 ) Facility-related 38 44 6 Other 448 465 17 Total selling, general and administrative expenses $ 1,816 $ 1,568 $ (248 ) Selling, general and administrative expenses were approximately $1.8 million for the three months ended September 30, 2021, as compared to approximately $1.6 million for the three months ended September 30, 2020. The increase of $200,000 in selling, general and administrative expenses was primarily due to an increase of $186,000 in net salary costs and an increase in professional fees of $85,000, offset by a decrease of $17,000 in other selling, general and administrative expenses and a decrease in facility related expenses of $6,000. The increase in net salary costs of $186,000 was due primarily to incentive bonuses accruals of $131,000 in the three months ended September 30, 2021, the impact of incremental strategic hiring in the three months ended June 30, 2021 of $50,000 and increased stock compensation due to the issuance of certain common stock option awards. The increase in professional services expenses of $85,000 was primarily due to increased legal expenses incurred in patent registration filings. The decrease in other selling, general and administrative expenses of $17,000 was primarily due to reduced miscellaneous expenses offset by increased travel expenses and increased selling and marketing initiatives. The increase in travel expenses was a direct result of eased COVID-19 travel restrictions that were put in place at the end of March 2020. The increase in marketing expenses is a result of costs associated with rebranding activities to highlight the commercial focus of the Company and continued on-line marketing program expansion in the three months ended September 30, 2021. The decrease in facilities related expenses of $6,000 for the three months ended September 30, 2021 over the same period in 2020 is a direct result of the expiration of a facility lease of 7,632 square feet of manufacturing space in Flagstaff, Arizona at December 31, 2020. Interest Income/Expense, Net We recorded interest expense, net of $0 for the three months ended September 30, 2021, as compared to interest expense, net of $7,000 for the same period in 2020. The $7,000 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 September 30, 2020 and increased interest income in the three months ended September 30, 2021 as a result of higher investments in cash invested in money market accounts. Other Income (Expense) Other income, net, of $0 for the three months ended September 30, 2021 was unchanged as compared to the same period in 2020. 33 Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020: Grant Revenue Grant revenue for the nine months ended September 30, 2021 was $24,000 compared to $0 in the same period of 2020 and was granted for jobs created and related new employee training in the City of Phoenix, Arizona during the nine months ended September 30, 2021. Sales Sales, shown net of sales discounts and promotions, were $407,000 for the nine months ended September 30, 2021, compared to $185,000 for the same period in 2020. Sales increased by $222,000 in the nine months ended September 30, 2021 due, in part, to the continued focus on of our internet sales initiatives, 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 enhanced strategic partnerships and collaborations with key distributors and PMPs. We believe the benefits of these initiatives continue to be impacted by reduced spending by customers due to the COVID-19 pandemic. Cost of Sales Cost of sales was $275,000 or 67.6% of sales, exclusive of grant revenue, for the nine months ended September 30, 2021, compared to $106,000 or 57.3% of sales, exclusive of grant revenue, for the nine months ended September 30, 2020. The increase in cost of sales of $169,000 in the nine months ended September 30, 2021 is primarily due to higher sales volume as well as the impact of increases in manufacturing scrap associated with manufacturing scale up activities during 2021. The increase in cost of sales as a percentage of net sales was primarily due to the impact of increased new customer sales incentives during the nine months ended September 30, 2021 and increases in manufacturing scrap associated with manufacturing scale up activities as noted above. We continue to focus on manufacturing process improvement and efficiencies. We anticipate cost of sales 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 nine months ended September 30, 2021 was $156,000 or 36.2% of total revenue, compared to a gross profit of $79,000 or 42.7% of total revenuefor the same period in 2020. The increase in gross profit of $77,000 for the nine months ended September 30, 2021 as compared to the same period in 2020 was primarily due to the impact of increased sales volume and the receipt of $24,000 of training grant revenues received. The decrease in gross profit as a % of net sales was a direct result of the impact of increased new customer sales incentives during the nine months ended September 30, 2021 as well as the increased manufacturing scrap discussed above, offset by the gross profit impact of grant revenue. Research and Development Expenses Nine Months Ended September 30, Increase 2021 2020 (Decrease) (in thousands) Direct research and development expenses: Personnel related (including stock-based compensation) $ 669 $ 414 $ (255 ) Professional fees 217 107 (110 ) Facility-related 72 122 50 Other 466 259 (207 ) Total research and development expenses $ 1,424 $ 902 $ (522 ) Research and development expenses were $1.4 million for the nine months ended September 30, 2021, compared to $902,000 for the same period in 2020. The $500,000 increase in research and development expenses was primarily due to an increase of $255,000 in manufacturing personnel-related costs relative to the same period of 2020, which was impacted by the COVID-19 pandemic, in addition to increases in manufacturing and regulatory headcount to meet current and future demand. 34 The increase in professional fee expenses of $110,000 in the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to increased regulatory legal expenses and expenses related to field and regulatory compliance studies. The increase in other research and development expenses of $207,000 in the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to increased expenses related to field and regulatory compliance studies and increased shipping expenses due to higher sales volume during the period. Facility-related expenses decreased $50,000 for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, due primarily to the expiration of a facility lease of 7,632 square feet of manufacturing space in Flagstaff, Arizona at December 31, 2020. Selling, General and Administrative Expenses Nine Months Ended September 30, Increase 2021 2020 (Decrease) (in thousands) Direct selling, general and administrative expenses: Personnel related (including stock-based compensation) $ 3,046 $ 2,591 $ (455 ) Professional fees 825 1,108 283 Facility-related 119 130 11 Other 1,183 1,211 28 Total selling, general and administrative expenses $ 5,173 $ 5,040 $ (133 ) Selling, general and administrative expenses were approximately $5.2 million for the nine months ended September 30, 2021, as compared to approximately $5.0 million for the nine months ended September 30, 2020. The increase of $200,000 in selling, general and administrative expenses was primarily due to an increase of $455,000 in net salary costs, offset by a decrease of $283,000 in professional service expenses, a decrease in other selling, general and administrative expenses of $28,000 and a decrease in facility related expenses of $11,000. The increase in net salary costs of $455,000 was due primarily to recognition of incentive compensation expense for employees of $362,000, severance expense of $40,000 for the elimination of in-house marketing program headcount in June 2021 and increased stock compensation due to the issuance of certain common stock option awards of $53,000 in the nine months ended September 30, 2021. The $283,000 decrease in professional services expenses for the nine months ended September 20, 2021 over the nine months ended September 30, 2020 was primarily due to reduced legal expenses related to a litigation settlement incurred in the nine months ended September 30, 2020 that were not incurred in the same period of 2021, partially offset by an increase in professional services expenses relating to legal patent registration filings in the nine months ended September 30, 2021 that were not incurred in the same period of 2020. The $28,000 decrease in other selling, general and administrative expenses for the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to $34,000 of increased marketing expenses is a result of costs associated with rebranding activities to highlight the commercial focus of the Company and on-line marketing program expansion and increase in travel expenses as a direct result of eased COVID-19 travel restrictions that were put in place at the end of March 2020, offset by a $62,000 decrease in transfer agent fees in the nine months ended September 30, 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. 35 The decrease in facilities related expenses of $11,000 for the nine months ended September 30, 2021 over the same period in 2020 is a direct result of the expiration of a facility lease of 7,632 square feet of manufacturing space in Flagstaff, Arizona at December 31, 2020. Interest Income/Expense, Net We recorded interest expense, net of $5,000 for the nine months ended September 30, 2021, as compared to interest expense, net of $20,000 for the same period in 2020. The $15,000 decrease in interest expense, net for the period was a result of decreased interest expense on certain notes payable and finance leases that expired during 2020 and increased interest income as a result of higher investments in cash invested in money market accounts.. Paycheck Protection Program Loan Forgiveness PPP loan forgiveness income for the nine months ended September 30, 2021 represents the forgiveness of a promissory note pursuant to the PPP under the CARES Act that the Company secured under this program. Other Income (Expense) Other income, net, was $22,000 for the nine months ended September 30, 2021 as compared to $18,000 for the period ended September 30, 2020. Other income, net for the nine months ended September 30, 2021 primarily represented a payroll benefits accrual from 2019 that was reversed as the liability period had expired. The $18,000 other income, net for the nine month period ended September 30, 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 September 30, 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 $1.4 million in net product sales. As of September 30, 2021, we had an accumulated deficit of $110.0 million and cash and cash equivalents of $11.1 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. This loan was fully forgiven, under terms of the PPP, on June 14, 2021. 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 September 30, 2021, in combination with anticipated revenue and 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, including within the next 12 months, 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. 36 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 continue to 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; ● Ramp up of our sales, marketing, advertising and distribution expenses 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, and to maintain, 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. 37 Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented: Nine Months Ended September 30, 2021 2020 Cash used in operating activities $ (6,033 ) $ (5,496 ) Cash used in investing activities (83 ) (4 ) Cash provided by financing activities 13,556 6,281 Net increase in cash and cash equivalents $ 7,440 $ 781 Operating Activities . During the nine months ended September 30, 2021, operating activities used $6.0 million of cash, primarily resulting from our net loss of $5.8 million, changes in our operating assets and liabilities of $387,000, offset by non-cash charges of $128,000, consisting primarily of stock-based compensation, depreciation and amortization and by the Paycheck Protection Program loan forgiveness during the period. 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 nine months ended September 30, 2021 of $387,000 consisted primarily of an increase in prepaid expenses of $403,000, an increase in inventory of $62,000 and an increase in accounts receivable of $54,000, offset by a net increase in accrued expenses and accounts payable of $121,000 and a decrease in other assets of $11,000. During the nine months ended September 30, 2020, operating activities used $5.5 million of cash, primarily resulting from our net loss of $5.9 million and by changes in our operating assets and liabilities of $285,000, offset by non-cash charges of $654,000, 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 nine months ended September 30, 2020, consisted primarily of a net decrease in accrued expenses and accounts payable of $460,000 and an increase in prepaid expenses of $24,000 offset by a decrease in inventory of $78,000, a decrease in receivables of $119,000 and a decrease in other assets of $2,000. Investing Activities. For the nine months ended September 30, 2021, net cash used in investing activities was $83,000 due to the purchases of property, plant and equipment and increases in construction in progress of $84,000, offset by proceeds on sale of property and equipment of $1,000. For the nine months ended September 30, 2020, net cash used in investing activities was $4,000 due to the sale of property and equipment of $44,000, offset by purchases of property, plant and equipment and construction in progress of $40,000. Financing Activities. During the nine months ended September 30, 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 $40,000 related to payments of finance lease obligations, $36,000 related to repayments of notes payable and $17,000 for the payment of employee withholding taxes related to share based awards. 38 During the nine months ended September 30, 2020, net cash provided by financing activities was $6.3 million as a result of $5.7 million in net proceeds from the issuance of common stock and net proceeds of $646,000 from the issuance of a note pursuant to the Paycheck Protection Program, offset by $44,000 of repayments related to notes payable and $62,000 in repayments of finance lease obligations. 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 $214,000 and $162,000 for the three months ended September 30, 2021 and September 30, 2020, respectively, and approximately $550,000 and $453,000 for the nine months ended September 30, 2021 and September 30, 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. 39 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Research and development $ 1 $ 2 $ 2 $ 7 Selling, general and administrative 213 160 548 446 Total stock-based compensation expense $ 214 $ 162 $ 550 $ 453 The intrinsic value of stock options outstanding as of September 30, 2021 was $0. 40 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. We will cease to be an emerging growth company at the end of 2021. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.