SenesTech, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – 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 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 statements. 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.S. registration for ContraPest to broaden the marketability and use of ContraPest, and if ContraPest begins to generate sufficient revenue, regulatory approvals for additional jurisdictions beyond the United States; ● our belief that ContraPest is unique in the pest control industry in affecting the reproductive systems of both male and female rats; ● our belief that our field data shows ContraPest will result in a sustained reduction of the rat population; ● our belief that ContraPest is the first and only non-lethal, fertility control product registered with the EPA for the management of rat populations; ● our expectation to continue to incur significant expenses and operating losses for the foreseeable future; ● our expectation that cash and cash equivalents at September 30, 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 three to six months; ● our belief that sales increased in part due to continued focus of our internet sales initiatives, enhanced strategic partnership and collaborations with key distributors and PMPs; ● our belief that the increased sales activity from our field sales organization was due in part to the launch of our new Elevate product offering; ● 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 in the future and to continue to recognize stock-based compensation expense in future periods; 23 ● our goal to shift resources to commercialization, significantly reducing our year-over-year burn rate and achieving a 50% or greater gross margin; ● our belief that our raw materials stock will reduce the risk of impact on manufacturing for potential supply interruptions due to the COVID-19 pandemic, supply chain issues or long lead times on certain ingredients.; ● our maintaining and obtaining regulatory approval of our products and product candidates; ● our successful commercialization of ContraPest; ● our ability to obtain market acceptance, commercial viability and profitability of ContraPest and other products; ● our ability to market our products and establish an effective sales force and marketing infrastructure to generate significant revenue; ● the success of our research and development activities; ● our ability to retain and attract key personnel to develop, operate and grow our business; ● our ability to meet our working capital needs; ● our estimates or expectations related to our revenue, cash flow, expenses, capital requirements and need for additional financing; ● our belief that if we encounter continued issues or delays in the commercialization of ContraPest, our prior losses and expected future losses could have an adverse effect on our financial condition and negatively impact our ability to fund continued operations, obtain additional financing in the future and continue as a going concern; ● our belief that we are potentially subject to concentrations of credit risk in our accounts receivable; ● our belief that our existing facilities are adequate and meet our current needs for business, manufacturing and research; ● our ability, and the time required, to improve our cost structure and gross margins, and limit our cash burn; ● our plans for our business, including for research and development; ● our ability to enter into strategic partnerships to enable us to penetrate additional target markets and geographical locations; ● the adequacy of our facilities to meet our current needs; ● our belief the claims against us do not have merit and our intention to aggressively defend against these accusations; ● our belief the litigation against us is not likely to have a material effect on our operations; ● 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. 24 These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and situations that are difficult to predict and that may cause our own, or our industry’s, actual results to be materially different from the future results that are expressed or implied by these statements. Accordingly, actual results may differ materially from those anticipated or expressed in such statements as a result of a variety of factors, including those discussed in Item 1A-“Risk Factors” of Part I of our Annual Report on Form 10-K, for the year ended December 31, 2021, filed with the SEC on March 29, 2022, and those contained from time to time in our other filings with the SEC. 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; and ● regulatory approval and regulation of our products and other factors and risks identified from time to time in our filings with the SEC, 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. Although 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 SEC. 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. Overview Since our inception, we have sustained significant operating losses in the course of our research and development and commercialization activities and expect such losses to continue for the near future. We have generated limited revenue to date from product sales, research grants and licensing fees received under our former license agreement. We have primarily funded our operations to date through the sale of equity securities, including convertible preferred stock, common stock and warrants to purchase common stock. See Note 10 for a description of our public equity sales. Through September 30, 2022, we 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 $2.0 million from licensing fees and an aggregate of $2.3 million in net product sales. As of September 30, 2022, we had an accumulated deficit of $120 million and cash and cash equivalents of $2.8 million. On June 18, 2021, we 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 us 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. 25 We have incurred significant operating losses every year since our inception. Our net losses were $2.6 million and $2.3 million for the three months ended September 30, 2022 and 2021, respectively, and $7.5 million and $5.8 million for the nine months ended September 30, 2022 and 2021, respectively. We expect to continue to incur significant expenses and generate operating losses for at least the next 6 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; (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, 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 three to six 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 three to six 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. While the effect and impact of the COVID-19 pandemic on revenue during the nine months ended September 30, 2022 and September 30, 2021 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 have now resumed all projects. Components of our Results of Operations Sales Sales are comprised primarily of sales, net of discounts and promotions, of ContraPest and related components, to our distributors and customers, as well as consulting and implementation services provided in conjunction with ContraPest deployments. Cost of Sales Cost of sales consist primarily of cost of products sold, including scrap and reserves for obsolescence and the cost of freight billed to our customers. We continue to focus on improving our cost structure, with the goals of shifting resources to commercialization, significantly reducing our year-over-year burn rate and achieving a 50% or greater gross margin. Steps have included relocating to more cost-efficient space, organizational restructuring, and improving our manufacturing and supply processes and reducing staffing. 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, 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; and ● facilities, depreciation, unbilled customer freight charges and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and supplies. 26 We expense research and development costs as incurred. We continue to investigate other applications 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 Selling, general and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance, sales, marketing and administrative functions. Selling, general and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, consulting, accounting and audit services. We plan to continue to utilize various forms of stock-based compensation awards in order to attract and retain qualified employees. As a result, we anticipate that stock-based compensation expense will continue to represent a significant portion of our selling, general and administrative expenses for the foreseeable future. Interest Income Interest income consists primarily of interest income earned on cash and cash equivalents. Interest Expense Interest expense consists primarily of interest accrued on our finance lease and note commitments. Other Income (Expense), Net Other income (expense), net, consists primarily of any recognized gains or losses related to the sale of fixed assets. In 2021, other income also included the reversal of a payroll benefits accrual from 2019 that was reversed as the liability period had expired. Income Taxes Deferred tax assets and liabilities are determined based on differences between the financial statement and tax basis of assets and liabilities, as well as a consideration of net operating loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected to impact taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. Our effective tax rate for the nine months ended September 30, 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 U.S. federal or state income tax benefits for the net operating losses we have incurred in each year in our history or for our generated research and development tax credits, due to the uncertainty regarding our ability to realize a benefit from these tax attributes. Based 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. 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. Included in the $77.2 million of federal loss carryforwards are approximately $32.7 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 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. 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. We 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. During the three months ended June 30, 2021, we received notification that a loan to us under the Paycheck Protection Program (the “PPP”) in the amount of $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 us. 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 our tax accounts. 27 The following table summarizes our results of operations for the three and nine months ended September 30, 2022 and 2021: For the Three Months For the Nine Months Ended September 30, Ended September 30, 2022 2021 2022 2021 Revenue: Sales $ 250 $ 159 $ 722 $ 407 Grant Revenue - 24 - 24 Total revenue 250 183 722 431 Cost of sales 128 106 374 275 Gross profit 122 77 348 156 Operating expenses: Research and development 452 514 1,399 1,424 Selling, general and administrative 2,289 1,816 6,473 5,173 Total operating expenses 2,741 2,330 7,872 6,597 Net operating loss (2,619 ) (2,253 ) (7,524 ) (6,441 ) Other income (expense): Interest income 1 2 4 5 Interest expense - (2 ) (1 ) (10 ) Payroll Protection Program loan forgiveness - - - 650 Other income (expense) (28 ) - (26 ) 22 Total other income (27 ) - (23 ) 667 Net loss and comprehensive loss $ (2,646 ) $ (2,253 ) $ (7,547 ) $ (5,774 ) Weighted average common shares outstanding - basic and fully diluted 12,212,950 12,190,257 12,212,950 10,850,197 Net loss per common share - basic and fully diluted $ (0.22 ) $ (0.18 ) $ (0.62 ) $ (0.53 ) Comparison of the Three Months Ended September 30, 2022 and 2021 Sales Sales, net of sales discounts and promotions, were $250,000 for the three months ended September 30, 2022, compared to $183,000 for the same period in 2021. Sales increased by $67,000 in the three months ended September 30, 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 Pest Management Professionals (“PMP”s). In addition, we saw increased sales activity from our field sales organization including the launch of our new Elevate product offering. 28 Cost of Sales Cost of sales was $128,000, or 51.2% of net sales, for the three months ended September 30, 2022, compared to $106,000, or 66.7% of net sales, for the three months ended September 30, 2021. The increase in cost of goods sold of $15,000 in 2022 is primarily due to higher sales volume. The decrease in cost of sales as a percentage of net sales during the three months ended September 30, 2022 was due to lower production scrap and manufacturing process improvements and efficiencies. Gross Profit Gross profit for the three months ended September 30, 2022 was $122,000, or 48.8% of net sales, compared to a gross profit of $77,000, or 42.1% of net product sales, for the same period in 2021. The increase in gross profit was a direct result of the impact of increased sales over lower production scrap and continued manufacturing efficiencies. Research and Development Expenses Three Months Ended September 30, Increase 2022 2021 (Decrease) (in thousands) Direct research and development expenses: Personnel related (including stock-based compensation) $ 283 $ 177 $ 106 Professional fees 54 92 (38 ) Depreciation 35 78 (43 ) Freight 24 32 (8 ) Facility-related 27 26 1 Other 29 109 (80 ) Total research and development expenses $ 452 $ 514 $ (62 ) Research and development expenses were $452,000 for the three months ended September 30, 2022, compared to $514,000 for the same period in 2021. The $62,000 decrease in research and development expenses was primarily due to a decrease of $43,000 in depreciation expense a decrease in other research and development expenses of $101,000, a $38,000 decrease in professional fees and an $8,000 decrease in freight expense offset by an increase in personnel-related costs of $106,000, and a $1,000 increase in facility related expenses. Personnel related expense, including stock-based compensation expense increased for the three months ended September 30, 2022, relative to the same period of 2021, due to the full quarter impact of headcount additions made in 2021 to meet current and future demand. Professional fees decreased $38,000 for the three months ended September 30, 2022, relative to the same period of 2021, primarily due to completion of consulting fees in 2021 for products sold in the current year. Depreciation expense decreased $43,000 for the three months ended September 30, 2022 over the three months ended September 30, 2021 due to several assets becoming fully depreciated during the prior quarter. Facility-related expenses increased $1,000 due primarily to contractual rent escalation in our facility lease contracts. The decrease in other research and development expenses of $80,000 in the three months ended September 30, 2022 compared to the same period in 2021 was primarily due to decreased 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. 29 Selling, General and Administrative Expenses Three Months Ended September 30, Increase 2022 2021 (Decrease) (in thousands) Direct selling, general and administrative expenses: Personnel related (including stock-based compensation) $ 952 $ 995 $ (43 ) Professional fees 639 335 304 Facility-related 38 38 - Marketing 261 103 158 Office supplies/IT 118 78 40 Insurance 143 125 18 Travel and entertainment 46 25 21 Other 92 117 (25 ) Total selling, general and administrative expenses $ 2,289 $ 1,816 $ 473 Selling, general and administrative expenses were approximately $2.3 million for the three months ended September 30, 2022, as compared to approximately $1.8 million for the three months ended September 30, 2021. The increase of $473,000 in selling, general and administrative expenses was primarily due to an increase of $304,000 in professional fees, a $158,000 increase in marketing expenses, a $40,000 increase in office supplies/IT expenses, an $18,000 increase in insurance expense, and a $ 21,000 increase in travel and entertainment, offset by a $43,000 decrease in personnel related expenses and a $25,000 decrease in other expenses. The increase in professional services expenses for the three months ended September 30, 2022 was primarily due to legal fees associated with on-going litigation, the special meeting and proxy vote. Other marketing expenses increased $158,000 during the three months ended September 30, 2022 over the same period in 2021 primarily due to increases in digital marketing advertising. Office supplies/IT expenses were higher during the three months ended September 30, 2022 over the same period in 2021 primarily due to increased IT support services and increased software subscriptions for staff. Travel and entertainment expenses for the three months ended September 30, 2022 were $21,000 higher than the same period in 2021 primarily due to the timing of early travel scheduled for 2022 taken in the third quarter. The decrease in net salary costs of $43,000 and the decrease in other costs of $25,000 for the three months ended September 30, 2022 over the same period in 2021 was due primarily to sales salary restructuring effective January 1, 2022. Interest Income/Expense, Net We recorded interest income, net of $1,000 for the three months ended September 30, 2022, as compared to interest expense, net of $0 for the same period in 2021. The $1,000 increase in interest income/expense, net for the period was a result of decreased interest expense on certain notes payable and finance leases that expired after September 30, 2021. Paycheck Protection Program Loan Forgiveness PPP loan forgiveness income for the three months ended September 30, 2021 represents the forgiveness of a promissory note pursuant to the PPP under the CARES Act, that we secured under this program. Other Income (Expense) Other Income (Expense), net was $(28,000) for the three months ended September 30, 2022 as compared to $0 for the three months ended September 30, 2021. The $(28,000) decrease of other income, net for the three months ended September 30, 2022 represent a loss on the facility fixed assets. 30 Comparison of the Nine Months Ended September 30, 2022 and 2021 Sales Sales, net of sales discounts and promotions, were $722,000 for the nine months ended September 30, 2022, compared to $407,000 for the same period in 2021. Sales increased by $291,000 in the first nine 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 including the launch of our new Elevate product offering. Cost of Sales Cost of sales were $374,000, or 51.8% of net sales, for the nine months ended September 30, 2022, compared to $275,000, or 67.5% of net sales, for the nine months ended September 30, 2021. The increase in cost of goods sold of $99,000 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 and manufacturing process improvements and efficiencies during the nine months ended September 30, 2022. Gross Profit Gross profit for the nine months ended September 30, 2022 was $348,000, or 48.2% of net sales, compared to a gross profit of $156,000, or 36.2% 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 Nine Months Ended September 30, Increase 2022 2021 (Decrease) (in thousands) Direct research and development expenses: Personnel related (including stock-based compensation) $ 787 $ 669 $ 118 Professional fees 216 217 (1 ) Depreciation 103 114 (11 ) Freight 72 32 40 Facility-related 82 72 10 Other 139 320 (181 ) Total research and development expenses $ 1,399 $ 1,424 $ (25 ) Research and development expenses were $1.4 million for the nine months ended September 30, 2022 and the same period in 2021. Increases of $118,000 in personnel-related costs, $40,000 in freight expense and $10,000 in facility related expenses were offset by decreases of $181,000 in other research and development expenses, $11,000 in depreciation expense and $1,000 in professional fees. . Personnel related expense, including stock-based compensation expense for the nine months ended September 30, 2022 increased, relative to the same period of 2021, due to an increase in headcount to meet current and future demand. Depreciation expense decreased $11,000 for the nine months ended September 30, 2022 over the nine months ended September 30, 2021 due to several assets becoming fully depreciated during the period. Facility-related expenses increased $10,000 due primarily to contractual rent escalation in our facility lease contracts and a slight increase in utility expenses. The decrease in other research and development expenses of $181,000 in the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to process development improvements resulting in reduced waste and more efficient manufacturing expenses. 31 Selling, General and Administrative Expenses Nine Months Ended September 30, Increase 2022 2021 (Decrease) (in thousands) Direct selling, general and administrative expenses: Personnel related (including stock-based compensation) $ 3,137 $ 3,046 $ 91 Professional fees 1,539 825 714 Facility-related 116 119 (3 ) Marketing 506 222 284 Office supplies/IT 287 101 186 Insurance 454 359 95 Travel and entertainment 152 149 3 Other 282 352 (70 ) Total selling, general and administrative expenses $ 6,473 $ 5,173 $ 1,300 Selling, general and administrative expenses were approximately $6.5 million for the nine months ended September 30, 2022, as compared to approximately $5.2 million for the nine months ended September 30, 2021. The increase of $1.3 million in selling, general and administrative expenses was primarily due increases of $91,000 in net personnel related costs, $714,000 in professional fees, $284,000 increase in marketing expenses, $186,000 increase in office supplies/IT expenses, $95,000 increase in insurance expense, and a $3,000 increase in travel and entertainment offset by a $ 3,000 decrease in facility-related expenses and other selling, general and administrative expenses of $70,000. The increase in net personnel related costs of $91,000 was due primarily to stock-based compensation expense as well as an increase in headcount during the last 6 months of 2021. The increase in professional services expenses of $714,000 was primarily due to legal fees associated with on-going litigation, equity financing and increased consulting services. Marketing expenses increased $284,000 during the nine months ended September 30, 2022 over the same period in 2021 primarily due to increases in digital marketing advertising. Office supplies/IT expenses were $186,000 higher during the nine months ended September 30, 2022 over the same period in 2021 due to increased IT support services. Insurance expenses increased during the nine months ended September 30, 2022 primarily due to increased Directors and Officers insurance premiums. Other selling and general administrative expenses were $70,000 lower in the nine months ended September 30, 2022 over the same period in 2021 due to a decrease in interest expense from the termination of our capital lease requirements and notes payable and a decrease in franchise tax expense. Interest Income/Expense, Net We recorded interest income, net of $3,000 for the nine months ended September 30, 2022, compared to interest expense, net of $5,000 for the same period in 2021. The $8,000 increase in interest income/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 September 30, 2021. 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 we secured under this program. Other Income (Expense) Other Income (Expense), net was $(26,000) for the nine months ended September 30, 2022 as compared to other income of $22,000 for the nine months ended September 30, 2021. The $48,000 decrease of other income(expense) was primarily due to the impact of a payroll benefits accrual from 2019 that was reversed in 2021, as the liability period had expired and a loss on the facility fixed assets. 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. 32 Through September 30, 2022, we 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 $2.0 million from licensing fees and an aggregate of $2.3 million in net product sales. As of September 30, 2022, we had an accumulated deficit of $120 million and cash and cash equivalents of $2.8 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, 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 six to nine 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 six to nine 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. 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. 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, 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; and ● 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. We will need additional financing to fund these continuing and additional expenses. 33 Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented: Nine Months Ended September 30, 2022 2021 Cash used in operating activities $ (6,367 ) $ (6,033 ) Cash used in investing activities (135 ) (83 ) Cash (used in) provided by financing activities (32 ) 13,556 Net (decrease) increase in cash and cash equivalents $ (6,534 ) $ 7,440 Operating Activities . During the nine months ended September 30, 2022, operating activities used $6.3 million of cash, primarily resulting from our net loss of $7.5 million offset by changes in our operating assets and liabilities of $457,000 and by non-cash charges of $723,000, consisting primarily of stock-based compensation, depreciation and amortization and bad debt expense. 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 nine months ended September 30, 2022 of $457,000 consisted primarily of a decrease in prepaid expenses $ 174,000 and a decrease in accounts receivable of $ 16,000 offset by an increase in inventory of $ 48,000 , an increase in deferred revenue of $48,000 and a net increase in accrued expenses and accounts payable of $551,000. 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 and by non-cash charges of $128,000, consisting primarily of stock-based compensation, depreciation and amortization, offset 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. Investing Activities. For the nine months ended September 30, 2022, net cash used in investing activities was $135,000 due to the purchases of property, plant and equipment and construction in progress. 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. Financing Activities. During the nine months ended September 30, 2022, net cash used by financing activities was $32,000 as a result of $5,000 of repayments related to notes payable and $27,000 in repayments of finance lease obligations. 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. 34 Off-Balance Sheet Arrangements None. Critical Accounting Policies and Significant Judgments and Estimates Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements. Revenue Recognition Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers (“ASC 606”) . Under 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; (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 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 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 $139,000 and $214,000 for the three months ended September 30, 2022 and September 30, 2021, respectively, and approximately $570,000 and $550,000 for the nine months ended September 30, 2022 and September 30, 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 periods. 35 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. 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 Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Research and development $ - $ 1 $ 5 $ 2 Selling, general and administrative 139 213 565 548 Total stock-based compensation expense $ 139 $ 214 $ 570 $ 550 The intrinsic value of stock options outstanding as of September 30, 2022 was $0. 36 Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.