What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2022-11-14 · 138 added, 654 removed, 35 unchanged (96% of the section changed)

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

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

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;

● 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;

Specific forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding:

• our expectation that we will continue to incur significant expenses and generate operating losses for the foreseeable future;

• our expectation that cash and cash equivalents at March 31, 2023, 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 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 Pest Management Professionals (“PMP”s);

• 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 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 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 ability to enter into strategic partnerships to enable us to penetrate additional target markets and geographical locations;

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

• our ability to maintain and obtain regulatory approval for our product and product candidates;

• our ability to gain 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;

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

• 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.

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

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

• 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;

• developments and projections relating to our projects, competitors and our industry, including legislative developments and impacts from those developments.

These forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and situations that are difficult to predict and that may cause our own, or our industry’s, actual results to be materially different from the future results that are expressed or implied by these statements.

Accordingly, actual results may differ materially from those anticipated or expressed in such statements as a result of a variety of factors, including those discussed in Item 1A-“Risk Factors” of Part I of our Annual Report on Form 10-K, for the year ended December 31, 2022, filed with the SEC on March 17, 2023, 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.

factors include, among others, the following:

● the impacts and implications of the COVID-19 pandemic;

Such factors include, among others, the following:

• 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

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.

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.

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

(iii) the ability to market our products and establish an effective sales force and marketing infrastructure to generate significant

• 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.

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.

Through March 31, 2023, we received net proceeds of $93.6 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 $2.7 million in net product sales.

As of March 31, 2023, we had an accumulated deficit of $124.2 million and cash and cash equivalents of $2.7 million.

We have incurred significant operating losses every year since our inception, with net losses of $2.0 million and $2.3 million for the three months ended March 31, 2023 and 2022, respectively.

We expect to continue to incur significant expenses and generate operating losses for at least the next six 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;

(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 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;

● 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 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.

income consists primarily of interest income earned on cash and cash equivalents.

expense consists primarily of interest accrued on our finance lease and note commitments.

Income (Expense), Net

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.

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

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

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.

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.

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.

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.

of the other provisions of the CARES Act or CAA had a material impact to our tax accounts.

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,

Grant Revenue

Total revenue

Based upon our current operating plan, we expect that cash and cash equivalents at March 31, 2023, 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 months.

In April 2023, we consummated a registered direct offering with certain institutional investors and issued an aggregate of 857,146 shares of our common stock for $1.75 per share for gross proceeds of $1.5 million, before deducting fees payable to the placement agent and other estimated offering expenses payable by us.

While we have evaluated and continue to evaluate our operating expenses and concentrate our resources toward the successful commercialization of ContraPest in the United States, additional financing will be needed before achieving anticipated revenue targets and margin targets If 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, additional capital is needed in order to fund our operating losses and research and development activities before we become profitable.

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.

Results of Operations

The following table summarizes our results of operations for the periods presented (in thousands):

Three Months Ended March 31, % Increase (Decrease)

Revenues, net $ 233 $ 195 19 %

Cost of sales 141 105 34 %

Gross profit 92 90 2 %

Operating expenses:

2 unchanged sentences

Total operating expenses 2,137 2,423 (12) %

Net operating loss

Other income (expense):

Interest income

Interest expense

Payroll Protection Program loan forgiveness

Other income (expense)

Total other income

Net loss and comprehensive loss

Weighted average common shares outstanding - basic and fully diluted

Net loss per common share - basic and fully diluted

Comparison of the Three Months Ended September 30, 2022 and 2021

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

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 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 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

The increase in gross profit was a direct result of the impact of increased sales over lower production scrap and continued manufacturing

efficiencies.

Development Expenses

Three 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 $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.

Selling, General and Administrative Expenses

Three 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

Travel and entertainment

Total selling, general and administrative expenses

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

Income/Expense, Net

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

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.

Income (Expense)

Income (Expense), net was $(28,000) for the three months ended September 30, 2022 as compared to $0 for the three months ended September

The $(28,000) decrease of other income, net for the three months ended September 30, 2022 represent a loss on the facility

fixed assets.

Comparison of the Nine Months Ended September 30, 2022 and 2021

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.

Loss from operations (2,045) (2,333) (12) %

Other income, net 8 1 700 %

Net loss $ (2,037) $ (2,332) (13) %

Sales, net of sales discounts and promotions, were $233,000 for the first quarter of 2023, compared to $195,000 for the first quarter of 2022.

Sales increased by $38,000, in part, due to continued focus on 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 PMP.

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

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 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.

Cost of sales consist primarily of the cost of products sold, including scrap and reserves for obsolescence, and was $141,000, or 60.4% of net sales, for the first quarter of 2023, compared to $105,000, or 53.8% of net sales, for the first quarter of 2022.

The increase in cost of sales as a percentage of net sales during the first quarter of 2023 was driven by the scrapping of defective tanks no longer used in our products, which totaled $42,000.

Gross profit for the first quarter of 2023 was $92,000, for a gross profit margin of 39.6%, compared to a gross profit of $90,000, or a gross profit margin of 46.2%, for the first quarter of 2022.

The lower gross profit margin was the direct result of scrapping defective tanks no longer used in our products.

Excluding the cost associated with the scrapped inventory, gross profit margin is 57.8% for the first quarter of 2023.

Research and Development Expenses

Nine Months Ended

September 30,

(in thousands)

Direct research and development expenses:

Research and development expenses consisted of the following (in thousands):

Three Months Ended March 31, Increase

Personnel related (including stock-based compensation) $ 242 $ 241 $ 1

Professional fees 44 90 (46)

Depreciation 28 46 (18)

Facility-related 26 26 —

Total research and development expenses

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.

Other 47 113 (66)

Total $ 387 $ 516 $ (129)

Research and development expenses were $387,000 for the first quarter of 2023, compared to $516,000 for the first quarter of 2022.

The $129,000 decrease was primarily due to lower consulting and legal fees required for research and development purposes, lower depreciation as several assets became fully depreciated in 2023, and lower expenses related to field and product improvement studies.

Selling, General and Administrative Expenses

Nine Months Ended

September 30,

(in thousands)

Direct selling, general and administrative expenses:

Selling, general and administrative expenses consisted of the following (in thousands):

Three Months Ended March 31, Increase

Personnel related (including stock-based compensation) $ 903 $ 1,070 $ (167)

Professional fees 452 436 16

Facility-related

Office supplies/IT

Insurance 86 166 (80)

Travel and entertainment 74 46 28

Total selling, general and administrative expenses

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

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.

Income/Expense, Net

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

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.

Income (Expense)

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.

Office supplies/IT 71 83 (12)

Marketing 54 20 34

Facility-related 38 39 (1)

Other 72 47 25

Total $ 1,750 $ 1,907 $ (157)

Selling, general and administrative expenses were $1.8 million for the first quarter of 2023, as compared to $1.9 million for the first quarter of 2022.

The decrease of $157,000 was primarily due to lower personnel-related expenses, both lower stock-based compensation and lower headcount, combined with lower insurance and software-related license costs.

This decrease was partially offset by higher digital marketing advertising costs and travel and entertainment expenses as we continue to focus efforts on the commercialization of our products, as well as higher legal related to selling, general and administrative and software license costs.

Other Income, Net

Other income for the first quarter of 2023 consisted of interest income of $8,000, which was $6,000 higher than the first quarter of 2022 due to higher interest rates of the comparable periods.

Additionally, we had interest expense of $1,000 for the first quarter of 2022 related to certain notes payable and finance leases that expired in 2022.

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;

Since our inception, we have sustained significant operating losses in the course of our research and development activities and commercialization efforts and expect such losses to continue for the near future.

We have generated limited revenue to date from product sales, research grants and licensing fees received under a former license.

We have primarily funded our operations to date through the sale of equity securities, including convertible preferred stock, common stock and warrants to purchase common stock;

and debt financing, consisting primarily of convertible notes.

Through September 30, 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

(iii) the ability to market our products and establish an effective sales force and marketing infrastructure to generate significant

Through March 31, 2023, we have received net proceeds of $93.6 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 $2.7 million in net product sales.

As of March 31, 2023, we had an accumulated deficit of $124.2 million and cash and cash equivalents of $2.7 million.

And, in April 2023, we received net proceeds of $1.2 million from the sale of common stock.

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;

(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

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.

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.

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

● 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;

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 for 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.

We will need additional financing to fund these continuing and additional

The following table summarizes our sources and uses of cash for each

of the periods presented:

Nine Months Ended

September 30,

Cash used in operating activities

Cash used in investing activities

Cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

• 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.

The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):

Three Months Ended March 31,

Cash and cash equivalents, beginning of period $ 4,775 $ 9,326

Net cash used in:

Operating activities (2,015) (2,029)

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 (1) (66)

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

Financing activities (11) (16)

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.

Off-Balance Sheet Arrangements

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.

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.

our estimates and assumptions on an ongoing basis.

Our actual results may differ from these estimates under different assumptions or

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”) .

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

(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

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.

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 .

term represents the period that the stock-based awards are expected to be outstanding.

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 .

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 .

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 .

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.

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,

Research and development

Selling, general and administrative

Total stock-based compensation expense

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

Decrease in cash and cash equivalents (2,027) (2,111)

Cash and cash equivalents, end of period $ 2,748 $ 7,215

Cash Flows from Operating Activities— Cash flows from operating activities are generally determined by the amount and timing of cash received from customers and payments made to vendors, as well as the nature and amount of non-cash items, including depreciation and amortization and stock-based compensation included in operating results during a given period.

During the three months ended March 31, 2023, operating activities used $2.0 million of cash, primarily resulting from our net loss of $2.0 million offset by changes in our operating assets and liabilities of $178,000 and by non-cash charges of $200,000, consisting primarily of stock-based compensation and depreciation and amortization 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 used by changes in our operating assets and liabilities for the three months ended March 31, 2023 of $178,000 consisted primarily of a net decrease in accounts payable and accrued expenses of $301,000, partially offset by decreases in accounts receivable of $69,000, inventory of $38,000 and prepaid expenses of $28,000.

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, changes in our operating assets and liabilities of $13,000 and by non-cash charges of $290,000, consisting primarily of stock-based compensation and depreciation and amortization 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 used by changes in our operating assets and liabilities for the three months ended March 31, 2022 of $13,000 consisted primarily of decreases in inventory of $54,000 and accounts receivable of $21,000, offset by a net decrease in accounts payable and accrued expenses of $33,000 and an increase in prepaid expenses of $29,000.

Cash Flows from Investing Activities— Cash flows used in investing activities primarily consist of the purchase of property and equipment, offset by any proceeds received in connection with sales of property and equipment.

During the three months ended March 31, 2023 and 2022, cash flows used in investing activities consisted of property and equipment purchases of $1,000 and $66,000, respectively.

Cash Flows from Financing Activities— Financing activities provide cash for both day-to-day operations and capital requirements as needed.

During the three months ended March 31, 2023, net cash used in financing activities consisted of the payment of employee withholding taxes of $11,000.

During the three months ended March 31, 2022, net cash used in financing activities consisted of repayments notes payable and finance lease obligations of $16,000.

Critical Accounting Policies and Estimates

There have been no material changes to the Company’s critical accounting policies and estimates as previously disclosed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 17, 2023.

Quantitative and Qualitative Disclosures about Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis