What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-13 compared with 2021-11-12 · 312 added, 455 removed, 190 unchanged (80% of the section changed)

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this Quarterly Report on Form 10-Q,

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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 statements contained in this Quarterly Report

on Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as

amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

All statements other than

statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements

regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and

plans and objectives for future operations, are forward-looking statements.

In some cases, you can identify forward-looking statements

by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,”

“suggests,” “targets,” “contemplates,” “projects,” “predicts,” “may,”

“might,” “plan,” “would,” “should,” “could,” “can,” “potential,”

“continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking

However, not all forward-looking statements contain these identifying words.

Specific forward-looking statements in this Quarterly

Report on Form 10-Q include statements regarding:

our expectation to continue to pursue regulatory

approvals and amendments to the existing U.

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;

our expectation to continue to incur significant

expenses and operating losses for the foreseeable future;

our expectation that cash and cash equivalents

at March 31, 2022, 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 9 to 12 months;

our plan to continue to utilize various forms of stock-based compensation awards to attract and retain qualified employees;

our anticipation that stock-based compensation expense will continue to represent a significant portion of our selling, general and administrative expenses for the foreseeable future;

our expectation our expenses to continue or increase in connection with our ongoing activities, particularly as we focus on marketing and sales of ContraPest;

our expectation to continue to grant stock options and other equity-based awards, such as restricted stock units, in the future and to continue to recognize stock-based compensation expense in future periods;

our estimates or expectations related to our revenue, cash flow, expenses, capital requirements and need for additional financing;

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.

our belief the claims against us do not have merit and our intention to aggressively defend against these accusations;

These forward-looking statements are not

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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.

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,

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, 2021, filed with the SEC on March 29, 2022, 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.

A number of factors could cause our actual results to differ materially from those indicated

by the forward-looking statements.

Such factors include, among others, the following:

the impacts and implications of the COVID-19 pandemic;

the successful commercialization of our products;

market acceptance of our products;

regulatory approval and regulation of our products and other factors and risks identified from time to time in our filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q.

All forward-looking statements included herein are based on information

available to us as of the date hereof and speak only as of such date.

Except as required by law, we undertake no obligation to update

any forward-looking statements to reflect events or circumstances after the date of such statements.

The forward-looking statements contained

in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form

10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual

results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement.

we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results,

performance, or achievements.

We are subject to the information requirements

of the Exchange Act, and we file or furnish reports, proxy statements and other information with the Securities and Exchange Commission

Such reports and other information we file with the SEC are available free of charge at www.senestech.com as

soon as practicable after such reports are available on the SEC’s website at www.sec.gov.

The SEC’s website contains reports,

proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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

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.

See Note 9 - Common

Stock Warrants and Common Stock Warrant Liability for a description of our public equity sales.

Through March 31, 2022, we have received net proceeds

of $89.6 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 $1.7 million in net product sales.

As of March 31, 2022, we

had an accumulated deficit of $114.8 million and cash and cash equivalents of $7.2 million.

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.

Our net losses were $2.3 million and $1.8 million for the three months ended March 31, 2022 and 2021,

respectively.

We expect to continue to incur significant expenses and generate operating losses for at least the next 12 months.

Our ultimate success depends upon the

outcome of a combination of factors, including the following:

(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 activities;

(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.

We will need additional funding in order to continue

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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.

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.

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.

While the effect and impact of the COVID-19 pandemic

on revenue during the three months ended March 31, 2022 is difficult to measure, the travel and other restrictions that started in 2020

resulted in a significant slowdown in our proof-of-concept field studies and sales efforts.

We were able to resume field studies in some

important projects 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;

however, we still have delays on certain projects that might remain on hold until further lifting of government

restrictions.

These continued delays may 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

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 and other restrictions 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 are comprised primarily of sales, net of

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resources to commercialization, significantly reducing our year-over-year burn rate and achieving a 50% or greater gross margin.

have included relocating to more cost-efficient space, organizational restructuring, improving our manufacturing and supply processes

have included relocating to more cost-efficient space, organizational restructuring, and improving our manufacturing and supply processes

and reducing staffing.

We expect to realize the benefits from these steps in the coming quarters.

Operating Expenses

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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;

employee related expenses, including salaries, related benefits, travel and stock-based compensation expense for employees engaged in research and development functions, including that portion of manufacturing not included in cost of goods sold;

expenses incurred in connection with the development of our product candidates including related regulatory and production expenses:

Facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and supplies.

facilities, depreciation, unbilled customer freight

charges 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.

of our core technology to other product candidates and modifications to our existing products to expand usability, which includes laboratory

tests, corporate relationships 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

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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.

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

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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.

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

Our effective tax rate for the three months ended March 31, 2022, as well as for the year ended December 31, 2021, has

been impacted by the full valuation allowance on our deferred tax assets.

Since our inception, we have not recorded any

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.

on tax return activity through December 31, 2021, we had federal and state net operating loss carryforwards of approximately $77.2 million

and $63.7 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.

We are accruing additional net operating losses in calendar year 2022, 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.

state loss carryforwards begin to expire in 2032, unless previously utilized.

Included in the $77.2 million of federal loss carryforwards

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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

loss carryforwards is subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state

tax provisions due to ownership change limitations that have occurred previously or that could occur in the future.

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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.

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

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.

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.

of the Three Months Ended September 30, 2021 and 2020

of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period.

have 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, our net operating losses could be limited.

Comparison of the Three Months Ended March 31, 2022 and 2021

The following table summarizes our results of

operations for the three and nine months ended September 30, 2021 and 2020:

operations for the three months ended March 31, 2022 and 2021:

For the Three Months

For the Nine Months

Ended September 30,

Grant revenue

Total revenue

Ended March 31,

Cost of sales

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Interest expense

Payroll Protection Program loan forgiveness

Total other income

Net loss and comprehensive loss

Deemed dividend-warrant price protection-revaluation adjustment

Net loss attributable to common shareholders

Weighted average common shares outstanding - basic and fully diluted

Net loss per common share - basic and fully diluted

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, 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.

Sales, shown net of sales discounts and promotions, were $195,000 for

the three months ended March 31, 2022, compared to $88,000 for the same period in 2021.

Sales increased by $107,000 in the first three

months of 2022 due, in part, to continued focus 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.

In addition, we saw increased sales activity from our field sales organization.

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

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.

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.

Cost of sales was $105,000 or 53.8% of net sales

for the three months ended March 31, 2022, compared to $50,000 or 56.8% of net sales for the three months ended March 31, 2021.

in cost of goods sold of $55,000 in 2022 is primarily due to higher sales volume.

The decrease in cost of sales as a percentage of net

sales was primarily due to lower production scrap during the three months ended March 31, 2022.

We continue to focus on manufacturing

process improvement and efficiencies.

Gross profit for the three months ended March

31, 2022 was $90,000 or 46.2% of net sales, compared to a gross profit of $38,000 or 43.2% of net sales, for the same period in 2021.

The increase in gross profit was a direct result of the impact of lower production scrap and continued manufacturing efficiencies as a

result of scale-up activities.

Research and Development Expenses

Three Months Ended

September 30,

(in thousands)

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Research and development expenses were $516,000

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

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.

for the three months ended March 31, 2022, compared to $455,000 for the same period in 2021.

The $61,000 increase in research and development

expenses was primarily due to an increase of $9,000 in personnel-related costs, a $14,000 increase in professional fees, a $15,000 increase

in freight expense, a $6,000 increase in facility related expenses and $44,000 increase in other research and development expenses, offset

by a $27,000 decrease in depreciation expense.

Personnel related expense, including stock-based

compensation expense, increased relative to the same period of 2021 due to an increase in headcount to meet current and future demand.

Professional fees increased relative to the same period of 2021 primarily

due to increased consulting expenses related to field and regulatory compliance studies and increased annual EPA and state registrations.

Unbilled freight expense increased for the three months

ended March 31, 2022 relative to the same period of 2021 primarily due to increased product sales volume associated with new customer

acquisition and increased freight rates due to increased fuel surcharges.

Facility-related expenses increased $6,000 due

primarily to contractual rent escalation in our facility lease contracts.

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.

expenses of $44,000 in the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to increased expenses

related to field and product improvement studies.

We also continue to develop our supply chain, particularly identifying and improving

our sourcing of key ingredients for our product candidates.

Depreciation expense decreased $27,000 for the

three months ended March 31, 2022 over the three months ended March 31, 2021 due to several assets becoming fully depreciated during the

Selling, General and Administrative Expenses

Three Months Ended

September 30,

(in thousands)

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Facility-related

Total selling, general and administrative expenses

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.

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, 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

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,

(in thousands)

Direct research and development expenses:

Personnel related (including stock-based compensation)

Professional fees

Facility-related

Total research and development expenses

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.

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,

(in thousands)

Direct selling, general and administrative expenses:

Personnel related (including stock-based compensation)

Professional fees

Facility-related

Office supplies/IT

Total selling, general and administrative expenses

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.

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.

Selling, general and administrative expenses were approximately $1.9

million for the three months ended March 31, 2022, as compared to approximately $1.4 million for the three months ended March 31, 2021.

The increase of $500,000 in selling, general and administrative expenses was primarily due to an increase of $212,000 in net salary costs,

an increase of $215,000 in professional fees, a $3,000 decrease in facility-related expenses, a $14,000 increase in office supplies/IT

expenses, a $48,000 increase in insurance expense and a decrease in other selling, general and administrative expenses of $1,000.

increase in net salary costs of $212,000 was due primarily to expenses related to an equity award to our employees as well as an increase

in administrative headcount during 2021.

The increase in professional services expenses was primarily due to professional services and

consultants associated with our marketing campaign.

Facility related expenses were lower during the three months ended March 31, 2022

over the same period in 2021 due to lower utility costs that were incurred in 2021 to wind down the Flagstaff facility not incurred in

Office supplies/IT expenses were higher during the three months ended March 31, 2022 over the same period in 2021 due to increased

IT support services.

Insurance expenses increased during the three months ended March 31, 2022 primarily due to increased Directors and

Officers insurance premiums.

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.

We recorded interest income, net of $1,000 for

the three months ended March 31, 2022, as compared to interest expense, net of $3,000 for the same period in 2021.

The $2,000 decrease in

interest expense, net for the period was a result of decreased interest expense on certain notes payable and finance leases that were

paid down or expired after March 31, 2021.

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.

Other income, net, was $0 for the three months

ended March 31, 2022 as compared to $21,000 for the three months ended March 31, 2021.

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.

had no other income in 2022.

Liquidity and Capital Resources

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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

Through March 31, 2022, we have received net proceeds

of $89.6 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 $1.7 million in net product sales.

As of March 31, 2022, we

had an accumulated deficit of $114.8 million and cash and cash equivalents of $7.2 million.

Our ultimate success depends upon the

outcome of a combination of factors, including the following:

(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 activities;

(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

Based upon our current operating plan, we expect

that cash and cash equivalents at March 31, 2022, 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 9 to 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 9 to 12 months, and we are unable to

raise the 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.

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.

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 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;

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 the 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

work to maximize market acceptance for, and generate sales of, our products, including by conducting field demonstrations at potential lead customers;

explore strategic partnerships to enable us to penetrate additional target markets and geographical locations;

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

seek additional regulatory approvals for ContraPest, including to more fully expand the market and use for ContraPest and, if we believe there is commercial viability, for our other product candidates;

further develop our manufacturing processes to contain costs while being able to scale 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, as our operating budget permits, advance the research and development programs for other product candidates;

maintain 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.

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

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uses of cash for each of the periods presented:

Nine Months Ended

September 30,

Three Months Ended

Cash used in operating activities

Cash used in investing activities

Cash provided by financing activities

Net increase in cash and cash equivalents

Cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

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,

During the three months ended March 31, 2022,

operating activities used $2.0 million of cash, primarily resulting from our net loss of $2.3 million offset by changes in our operating

assets and liabilities of $13,000 and by non-cash charges of $290,000, 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 generated by changes in our operating assets and liabilities

for the three months ended March 31, 2022 of $13,000 consisted primarily of a net decrease in accrued expenses and accounts payable of

$33,000 and an increase in prepaid expenses of $29,000, offset by a decrease in accounts receivable of $21,000 and by a decrease in inventory

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

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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.

for the three months ended March 31, 2021 of $422,000 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 $5,000.

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.

For the three months ended March 31, 2022, net

cash used in investing activities was $66,000 due to the purchases of property, plant and equipment and construction in progress.

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.

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.

During the nine months ended September 30, 2020,

During the three months ended March 31, 2022,

net cash used by financing activities was $16,000 as a result of $3,000 of repayments related to notes payable and $13,000 in repayments

of finance lease obligations.

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 $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.

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.

Off-Balance Sheet Arrangements

Critical Accounting Policies and Significant Judgments and Estimates

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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:

Effective January 1, 2018, we adopted Accounting

Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers (“ASC 606”) .

ASC 606, we recognize 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;

(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:

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

(1) persuasive evidence of an arrangement exists;

(2) the performance of service has been rendered

to a customer or delivery has occurred;

(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.

and (4) the collectability of the fee is reasonably

The performance obligations identified by us under ASC 606 are straightforward and similar to the unit of account and performance

obligation determination under ASC Topic 605, Revenue Recognition .

We recognize revenue when product is shipped at

a fixed selling price on payment terms of 30 to 120 days from invoicing.

We recognize other revenue earned from pilot studies, consulting

and implementation services upon the performance of specific services under the respective service contract.

We derive 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

Stock-Based Compensation

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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.

approximately $224,000 and $155,000 for the three months ended March 31, 2022 and March 31, 2021, 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

The Black-Scholes option-pricing model requires

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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

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

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:

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.

The assumptions underlying these valuations represent

management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.

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,

Research and development

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Total stock-based compensation expense

The intrinsic value of stock options outstanding as of September 30,

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.

The intrinsic value of stock options outstanding as of March 31, 2022

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis