What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-12 compared with 2021-08-13 · 341 added, 277 removed, 304 unchanged (67% of the section changed)

Management’s Discussion and

Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

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

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our areas and markets of focus, our pricing strategy, our strategic relationships and which geographic markets we target;

success and effectiveness of our products;

seeking, obtaining or maintaining regulatory approvals for our products and product candidates;

expectations regarding the potential market size for our products and how the market may develop;

The success and effectiveness of our products;

Our seeking, obtaining or maintaining regulatory approvals for our products and product candidates;

Our expectations regarding the potential market size for our products and how the market may develop;

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

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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, 2020, filed with the SEC on March 29, 2021, and Item 1A of Part II of this Form 10-Q, in each case entitled “Risk

Factors,” and those contained from time to time in our other filings with the Securities and Exchange Commission.

Readers are cautioned

not to place undue reliance on the forward-looking statements, which speak only as of the date made.

Except as required by law, we undertake

no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

These forward-looking statements are not

guarantees of future performance and involve known and unknown risks, uncertainties and situations that are difficult to predict and

that may cause our own, or our industry’s, actual results to be materially different from the future results that are

expressed or implied by these statements.

Accordingly, 27 actual results may differ materially from those anticipated or

expressed in such statements as a result of a variety of factors, including those discussed in Item 1A-“Risk Factors”

of Part I of our Annual Report on Form 10-K, for the year ended December 31, 2020, filed with the SEC on March 29, 2021, and Item 1A

of Part II of this Form 10-Q, in each case entitled “Risk Factors,” and those contained from time to time in our other

filings with the Securities and Exchange Commission.

Readers are cautioned not to place undue reliance on the forward-looking

statements, which speak only as of the date made.

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

forward-looking statement, whether as a result of new information, future events or otherwise.

Since our inception, we have sustained significant

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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;

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

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

and warrants to purchase common stock;

and debt financing, consisting primarily of convertible notes.

Through June 30, 2021, we have received net proceeds

of $89.3 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other promissory

notes, an aggregate of $1.7 million from licensing fees and an aggregate of $1.2 million in net product sales.

As of June 30, 2021, we

had an accumulated deficit of $107.8 million and cash and cash equivalents of $13.1 million.

Through September 30, 2021, we have received net

proceeds of $89.3 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other

promissory notes, an aggregate of $1.7 million from licensing fees and an aggregate of $1.4 million in net product sales.

As of September

30, 2021, we had an accumulated deficit of $110.0 million and cash and cash equivalents of $11.1 million.

On June 18, 2021, the Company received notification

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every year since our inception.

Our net losses were $1.7 million and $1.6 million for the three months ended June 30, 2021 and 2020, respectively,

and $3.5 million and $4.4 million for the six months ended June 30, 2021 and 2020, respectively.

We expect to continue to incur significant

expenses and generate operating losses for at least the next 12 months.

Our net losses were $2.3 million and $1.9 million for the three months ended September 30, 2021 and 2020,

respectively, and $5.8 million and $6.3 million for the nine months ended September 30, 2021 and 2020, respectively.

We expect to continue

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

We will need additional funding in order to continue

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While it is difficult to measure the effect and

impact of the COVID-19 pandemic on revenue during the six months ended June 30, 2021 and June 30, 2020, the travel and other restrictions

that started in March 2020 resulted in a significant slowdown in our proof-of-concept field studies and sales efforts.

While we were

able to resume field studies in some important projects by mid-year 2020 and initially believed that we would re-start all our most significant

field studies as we obtained limited waivers of certain travel bans, we still have delays on certain projects that might remain on hold

until certain businesses and government entities return to more normal operations.

Continued delays or new restrictions on travel or

operations as a result of new outbreaks and variants could impact our results in future quarters.

Initially, we believed that pest control

would continue through the COVID-19 pandemic as a necessity and we were and have been able to maintain our manufacturing with cautionary,

best practices put in place.

However, we have concerns about distributor, pest control operator and individual consumer spending as restrictive

measures related to the COVID-19 pandemic continue.

Extended stay at home orders across the world, whether imposed by governments or

individual businesses, have impeded our ability to communicate with current and prospective customers, potentially reducing sales until

the orders are lifted.

In addition, federal, state and municipal budgets continue to be severely strained as a result of the COVID-19

impact of the COVID-19 pandemic on revenue during the nine months ended September 30, 2021 and September 30, 2020, the travel and other

restrictions that started in March 2020 resulted in a significant slowdown in our proof-of-concept field studies and sales efforts.

we were able to resume field studies in some important projects by mid-year 2020 and initially believed that we would re-start all our

most significant field studies as we obtained limited waivers of certain travel bans, we still have delays on certain projects that might

remain on hold until certain businesses and government entities return to more normal operations.

Continued delays or new restrictions

on travel or operations as a result of new outbreaks and variants could impact our results in future quarters.

Initially, we believed

that pest control would continue through the COVID-19 pandemic as a necessity and we were and have been able to maintain our manufacturing

with cautionary, best practices put in place.

However, we have concerns about distributor, pest control operator and individual consumer

spending as restrictive measures related to the COVID-19 pandemic continue.

Extended stay at home orders across the world, whether imposed

by governments or individual businesses, have impeded our ability to communicate with current and prospective customers, potentially reducing

sales until the orders are lifted.

In addition, federal, state and municipal budgets continue to be severely strained as a result of the

COVID-19 pandemic.

This may delay or impede their ability to make near term purchases of our products.

While we have stocked certain long lead

time inventory raw material ingredients, any prolonged impact on the suppliers we rely on for the purchase of these items by the COVID-19

pandemic could impact future manufacturing operations.

Components of our Results of Operations

While we have stocked certain long

lead time inventory raw material ingredients, any prolonged impact on the suppliers we rely on for the purchase of these items by the

COVID-19 pandemic could impact future manufacturing operations.

Components of our Results

of Operations

Grant Revenue

Grant revenue is comprised entirely of grant funding provided by the

City of Phoenix, Arizona for jobs created and new employee training in the City of Phoenix, Arizona during the calendar year 2021.

Sales are comprised primarily of sales, net of

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

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

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

and reducing staffing.

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of costs incurred in connection with the research and development of ContraPest and our other product candidates, which costs include:

related expenses, including salaries, related benefits, travel and stock-based compensation expense for employees engaged in research

and development functions;

incurred in connection with the development of our product candidates;

● Facilities,

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

Employee related expenses, including salaries, related benefits, travel and stock-based compensation expense for employees engaged in research and development functions;

Expenses incurred in connection with the development of our product candidates [including related regulatory and production expenses];

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

We expense research and development costs as incurred.

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as professional fees for legal, consulting, accounting and audit services.

We plan to continue to utilize various forms of

stock-based compensation awards in order to attract and retain qualified employees.

As a result, we anticipate that stock-based compensation

expense will continue to represent a significant portion of our selling, general and administrative expenses for the foreseeable future.

We plan to continue to utilize various forms of stock-based

compensation awards in order to attract and retain qualified employees.

As a result, we anticipate that stock-based compensation expense

will continue to represent a significant portion of our selling, general and administrative expenses for the foreseeable future.

Interest Income

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to be realized.

The Company’s effective tax rate for the six months ended June 30, 2021, as well as for the year ended December

The Company’s effective tax rate for the nine months ended September 30, 2021, as well as for the year ended December

31, 2020, has been impacted by the full valuation allowance on the Company’s deferred tax assets.

The Company has not recorded any U.S.

federal or state income tax benefits

for our net operating losses incurred since inception or for our research and development tax credits generated to date, due to the uncertainty

regarding our ability to realize a benefit from these tax attributes in the future.

Based on tax return activity through December 31,

2020, the Company has federal and state net operating loss carryforwards of approximately $69.5 million and $56.1 million, respectively,

not considering any potential Internal Revenue Code of 1986 (“IRC”) Section 382 annual limitation discussed below.

is accruing additional net operating losses in calendar year 2021, which will be added to the carryover net operating loss balance once

the current year is completed.

or state income tax benefits for our net operating losses incurred since inception or for our research and development tax credits generated

to date, due to the uncertainty regarding our ability to realize a benefit from these tax attributes in the future.

Based on tax return

activity through December 31, 2020, the Company has federal and state net operating loss carryforwards of approximately $69.1 million

and $55.7 million, respectively, not considering any potential Internal Revenue Code of 1986 (“IRC”) Section 382 annual limitation

discussed below.

The Company is accruing additional net operating losses in calendar year 2021, which will be added to the carryover net

operating loss balance once the current year is completed.

The federal loss carryforwards begin to expire in 2029, unless previously utilized.

The state loss carryforwards

begin to expire in 2032, unless previously utilized.

Included in the $69.5 million of federal loss carryforwards are approximately $25.1

million of net operating losses that do not expire due to the tax law changes promulgated in conjunction with the Tax Cuts and Jobs Act

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

Included in the $69.1 million of federal loss carryforwards

are approximately $24.7 million of net operating losses that do not expire due to the tax law changes promulgated in conjunction with

the Tax Cuts and Jobs Act of 2017.

Additionally, the utilization of the net operating

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change is deemed to occur, the Company’s net operating losses could be limited.

During the current quarter, the Company received

notification that a loan to the Company 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 the Company.

Subsequent to the passage of the CARES Act, the IRS issued Notice

2020-32, which precludes a deduction for an expense that would otherwise be deductible if the payment results in the forgiveness of a

loan, thereby preventing entities from claiming a double tax benefit on the qualifying expenses for PPP loans.

27, 2020, the Consolidated Appropriations Act (“CAA”) was signed into law, which reverses existing IRS guidance provided in

Notice 2020-32 by allowing taxpayers to fully deduct any business expenses, regardless of whether the expense was paid for using forgiven

During the quarter ended June 30, 2021, the Company

received notification that a loan to the Company under the Paycheck Protection Program (the “PPP”) in the amount of approximately

$646 thousand was forgiven in full pursuant to the PPP program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES

Section 1106(i) of the CARES Act specifically requires taxpayers to exclude canceled indebtedness from PPP loans from gross

income, and accordingly, the debt forgiveness amount is nontaxable to the Company.

Subsequent to the passage of the CARES Act, the IRS

issued Notice 2020-32, which precludes a deduction for an expense that would otherwise be deductible if the payment results in the

forgiveness of a loan, thereby preventing entities from claiming a double tax benefit on the qualifying expenses for PPP loans.

27, 2020, the Consolidated Appropriations Act (“CAA”) was signed into law, which reverses existing IRS guidance provided

in Notice 2020-32 by allowing taxpayers to fully deduct any business expenses, regardless of whether the expense was paid for using forgiven

PPP loan proceeds.

None of the other provisions of the CARES Act or CAA had a material impact to the Company’s tax accounts.

Comparison of the Three Months Ended June 30, 2021 and 2020

of the Three Months Ended September 30, 2021 and 2020

The following table summarizes our results of

operations for the three and six months ended June 30, 2021 and 2020:

For the Three Months Ended

For the Six Months Ended

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

For the Three Months

For the Nine Months

Ended September 30,

Grant revenue

Total revenue

Cost of sales

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Net loss per common share - basic and fully diluted

Grant Revenue

Grant revenue for the three months ended September 30, 2021 was $24,000

compared to $0 in the same period of 2020 and was granted for jobs created and related new employee training in the City of Phoenix, Arizona

during the three months ended September 30, 2021.

Sales, shown net of sales discounts and promotions,

were $160,000 for the three months ended June 30, 2021, compared to $71,000 for the same period in 2020.

Sales increased by $89,000 in

the three months ended June 30, 2021 due, in part, to the continued focus on of our internet sales initiatives, augmenting our existing

pull through sales strategy, where demand from the consumer market encourages, or pulls, resellers and pest management professionals to

offer our products, as well as enhanced strategic partnerships and collaborations with key distributors and PMPs.

were $159,000 for the three months ended September 30, 2021, compared to $77,000 for the same period in 2020.

Sales increased by $82,000

in the three months ended September 30, 2021 due, in part, to the continued focus on of our internet sales initiatives, augmenting our

existing pull through sales strategy, where demand from the consumer market encourages, or pulls, resellers and pest management professionals

to offer our products, as well as enhanced strategic partnerships and collaborations with key distributors and PMPs.

While these initiatives

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Cost of Sales

Cost of sales was $119,000 or 74.4% of net sales

for the three months ended June 30, 2021, compared to $43,000 or 60.6% of net sales for the three months ended June, 2020.

in cost of goods sold of $76,000 in 2021 is primarily due to higher sales volume as well as an increase in manufacturing scrap associated

with manufacturing scale up activities.

The increase in cost of sales as a percentage of net sales was primarily due to the impact of

increased new customer sales incentives during the quarter ended June 30, 2021.

We continue to focus on manufacturing process

improvement and efficiencies.

We anticipate cost of goods sold as a percentage of sales will improve in the future due to manufacturing

efficiencies as a result of scale-up activities.

Gross profit for the three months ended June 30,

2021 was $41,000 or 25.6% of net sales, compared to a gross profit of $28,000 or 39.4% of net sales, for the same period in 2020.

decrease in gross profit was a direct result of the impact of increased new customer sales incentives during the quarter ended June 30,

Cost of sales was $106,000 or 66.7% of sales,

exclusive of grant revenue, for the three months ended September 30, 2021, compared to $41,000 or 53.2% of sales, exclusive of grant revenue,

for the three months ended September 30, 2020.

The increase in cost of sales of $65,000 in the three months ended September 30, 2021 is

primarily due to higher sales volume as well as the impact of increases in manufacturing scrap associated with manufacturing scale up

activities during 2021.

The increase in cost of sales as a percentage of sales was primarily due to the impact of increased new customer

sales incentives during the quarter ended September 30, 2021 and increases in manufacturing scrap associated with manufacturing scale

up activities during 2021 as noted above.

We continue to focus on manufacturing process improvement and efficiencies

and anticipate cost of sales as a percentage of sales will improve in the future due to manufacturing efficiencies as a result of scale-up

Gross profit for the three months ended September 30, 2021 was $77,000

or 42.1% of total revenue, compared to a gross profit of $36,000 or 46.8% of total revenue, for the same period in 2020.

in gross profit of $41,000 for the three months ended September 30, 2021 as compared to the same period in 2020 was primarily due to the

impact of increased sales volume and the receipt of $24,000 of training grant revenues in the period.

The decrease in gross profit as

a % of net sales was a direct result of the impact of increased new customer sales incentives during the quarter ended September 30, 2021

as well as the impact of increases in manufacturing scrap associated with manufacturing scale up activities during 2021 noted above.

Research and Development Expenses

Three Months Ended

September 30,

(in thousands)

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Personnel related (including stock-based compensation)

Professional fees

Facility-related

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Research and development expenses were $514,000

for the three months ended June 30, 2021, compared to $226,000 for the same period in 2020.

The $229,000 increase in research and development

expenses was primarily due to an increase of $159,000 in personnel-related costs, including stock-based compensation expense, due to an

increase in headcount.

for the three months ended September 30, 2021, compared to $380,000 for the same period in 2020.

The $134,000 increase in research and

development expenses was primarily due to an increase of $182,000 in other research and development costs, offset by a decrease in facility

related expenses of $20,000, a decrease in professional fees of $14,000 and a decrease in personnel related expenses of $14,000.

Facility-related expenses decreased $20,000 for

the three months ended June 30, 2021, compared to the three months ended June 20, 2020, due primarily to the expiration of a facility

lease of 7,632 square feet of manufacturing space in Flagstaff, Arizona at December 31, 2020.

the three months ended September 30, 2021, compared to the three months ended September 30, 2020, due primarily to the expiration of a

facility lease of 7,632 square feet of manufacturing space in Flagstaff, Arizona at December 31, 2020.

Personnel related expenses decreased $14,000 in

the three months ended September 30, 2021 compared to the same period in 2020 due primarily to delays in hiring as a result of employee

Professional fees decreased $14,000 in the three

months ended September 30, 2021 compared to the same period in 2020 due primarily to a decrease in regulatory legal expenses.

The increase in other research and development

expenses of $99,000 in the three months ended June 30, 2021 compared to the same period in 2020 was primarily due to increased expenses

related to field and regulatory compliance studies.

We also continue to improve our manufacturing process and formulation.

expenses of $182,000 in the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to increased shipping

expenses due to higher sales volume and field and regulatory compliance studies.

We also continue to incur expenses in improving our manufacturing

process and formulation.

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

Total selling, general and administrative expenses

Selling, general and administrative expenses were

approximately $1.9 million for the three months ended June 30, 2021, as compared to approximately $1.4 million for the three months ended

June 30, 2020.

The increase of $500,000 in selling, general and administrative expenses was primarily due to an increase of $417,000 in

net salary costs, $55,000 of travel and entertainment expenses and $53,000 in marketing programs, offset be a decrease of $37,000 in professional

service expenses.

The increase in net salary costs of $417,000 was due primarily to incentive bonuses to employees of $130,000 in May

2021, severance expense for the elimination of personnel related to in-house marketing programs in June 2021, the hiring of the Chief

Strategy Officer in May 2021, and $40,000 of increased stock compensation due to the issuance of certain common stock option awards.

approximately $1.8 million for the three months ended September 30, 2021, as compared to approximately $1.6 million for the three months

ended September 30, 2020.

The increase of $200,000 in selling, general and administrative expenses was primarily due to an increase of

$186,000 in net salary costs and an increase in professional fees of $85,000, offset by a decrease of $17,000 in other selling, general

and administrative expenses and a decrease in facility related expenses of $6,000.

The increase in net salary costs of $186,000 was

due primarily to incentive bonuses accruals of $131,000 in the three months ended September 30, 2021, the impact of incremental strategic

hiring in the three months ended June 30, 2021 of $50,000 and increased stock compensation due to the issuance of certain common stock

option awards.

The increase in professional services expenses of $85,000 was primarily due to increased legal expenses incurred in patent

registration filings.

The decrease in other selling, general and administrative

expenses of $17,000 was primarily due to reduced miscellaneous expenses offset by increased travel expenses and increased selling and

marketing initiatives.

The increase in travel expenses was a direct result

of eased COVID-19 travel restrictions that were put in place at the end of March 2020.

The $53,000 increase in marketing expenses is a

result of costs associated with rebranding activities to highlight the commercial focus of the Company and on-line marketing program expansion

in the three months ended June 30, 2021.

The decrease in professional services expenses was primarily due to reduced legal expenses related

to a litigation settlement incurred in the three months ended June 30, 2020 that were not incurred in the same period of 2021.

The increase in marketing expenses is a result

of costs associated with rebranding activities to highlight the commercial focus of the Company and continued on-line marketing program

expansion in the three months ended September 30, 2021.

The decrease in facilities related expenses of

$6,000 for the three months ended September 30, 2021 over the same period in 2020 is a direct result of the expiration of a facility lease

of 7,632 square feet of manufacturing space in Flagstaff, Arizona at December 31, 2020.

Interest Income/Expense, Net

We recorded interest expense, net of $2,000 for

the three months ended June 30, 2021, as compared to interest expense, net of $7,000 for the same period in 2020.

We recorded interest expense, net of $0 for the

three months ended September 30, 2021, as compared to interest expense, net of $7,000 for the same period in 2020.

The $7,000 decrease

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

after June 30, 2020.

Paycheck Protection Program Loan Forgiveness

PPP loan forgiveness income for the three months

ended June 30, 2021 represents the forgiveness of a promissory note pursuant to the PPP under the CARES Act, that the Company secured

under this program.

after September 30, 2020 and increased interest income in the three months ended September 30, 2021 as a result of higher investments

in cash invested in money market accounts.

Other Income (Expense)

Other income, net, was $1,000 for the three months

ended June 30, 2021 as compared to $3,000 for the same period in 2020.

The $2,000 decrease of other income, net for the three

months ended June 30, 2021 was due to recognized gains on the sale of fixed assets during the three months ended June 30, 2020.

Six Months Ended June 30, 2021 compared to Six Months Ended June

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

ended September 30, 2021 was unchanged as compared to the same period in 2020.

Nine Months Ended September 30, 2021 compared to Nine Months

Ended September 30, 2020:

Grant Revenue

Grant revenue for the nine months ended September 30, 2021 was $24,000

compared to $0 in the same period of 2020 and was granted for jobs created and related new employee training in the City of Phoenix, Arizona

during the nine months ended September 30, 2021.

Sales, shown net of sales discounts and promotions,

were $248,000 for the six months ended June 30, 2021, compared to $108,000 for the same period in 2020.

Sales increased by $140,000 in

the six months ended June 30, 2021 due, in part, to the continued focus on of our internet sales initiatives, augmenting our existing

pull through sales strategy, where demand from the consumer market encourages, or pulls, resellers and pest management professionals to

offer our products, as well as enhanced strategic partnerships and collaborations with key distributors and PMPs.

were $407,000 for the nine months ended September 30, 2021, compared to $185,000 for the same period in 2020.

Sales increased by $222,000

in the nine months ended September 30, 2021 due, in part, to the continued focus on of our internet sales initiatives, augmenting our

existing pull through sales strategy, where demand from the consumer market encourages, or pulls, resellers and pest management professionals

to offer our products, as well as enhanced strategic partnerships and collaborations with key distributors and PMPs.

We believe the benefits

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Cost of Sales

Cost of sales was $169,000 or 68.1% of net sales

for the six months ended June 30, 2021, compared to $65,000 or 60.2% of net sales for the six months ended June 30, 2020.

in cost of goods sold of $104,000 in the six months ended June 30, 2021 is primarily due to higher sales volume as well as an increase

in manufacturing scrap associated with manufacturing scale up activities.

The increase in cost of sales as a percentage of net sales was

primarily due to the impact of increased new customer sales incentives during the six months ended June 30, 2021 as well as the increased

manufacturing scrap noted above.

We continue to focus on manufacturing process

improvement and efficiencies.

We anticipate cost of goods sold as a percentage of sales will improve in the future due to manufacturing

efficiencies as a result of scale-up activities.

Gross profit for the three months ended June 30,

2021 was $79,000 or 31.9% of net sales, compared to a gross profit of $43,000 or 39.8% of net sales for the same period in 2020.

in gross profit was a direct result of the impact of increased new customer sales incentives during the six months ended June 30, 2021

as well as the increased manufacturing scrap discussed above.

Cost of sales was $275,000 or 67.6% of sales,

exclusive of grant revenue, for the nine months ended September 30, 2021, compared to $106,000 or 57.3% of sales, exclusive of grant revenue,

for the nine months ended September 30, 2020.

The increase in cost of sales of $169,000 in the nine months ended September 30, 2021 is

primarily due to higher sales volume as well as the impact of increases in manufacturing scrap associated with manufacturing scale up

activities during 2021.

The increase in cost of sales as a percentage of net sales was primarily due to the impact of increased new customer

sales incentives during the nine months ended September 30, 2021 and increases in manufacturing scrap associated with manufacturing scale

up activities as noted above.

We continue to focus on manufacturing process improvement and efficiencies.

We anticipate cost of sales as a percentage of sales will improve in the future due to manufacturing efficiencies as a result of scale-up

Gross profit for the nine months ended September 30, 2021 was $156,000

or 36.2% of total revenue, compared to a gross profit of $79,000 or 42.7% of total revenuefor the same period in 2020.

The increase in

gross profit of $77,000 for the nine months ended September 30, 2021 as compared to the same period in 2020 was primarily due to the impact

of increased sales volume and the receipt of $24,000 of training grant revenues received.

The decrease in gross profit as a % of net sales

was a direct result of the impact of increased new customer sales incentives during the nine months ended September 30, 2021 as well as

the increased manufacturing scrap discussed above, offset by the gross profit impact of grant revenue.

Research and Development Expenses

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Personnel related (including stock-based compensation)

Professional fees

Facility-related

Total research and development expenses

Research and development expenses were $910,000 for the six months

ended June 30, 2021, compared to $522,000 for the same period in 2020.

The $388,000 increase in research and development expenses was

primarily due to an increase of $254,000 in manufacturing personnel-related costs relative to the second quarter of 2020, which was impacted

by the COVID-19 pandemic, in addition to increases in manufacturing and regulatory headcount to meet current and future demand.

Research and development expenses were $1.4

million for the nine months ended September 30, 2021, compared to $902,000 for the same period in 2020.

The $500,000 increase in

research and development expenses was primarily due to an increase of $255,000 in manufacturing personnel-related costs relative to

the same period of 2020, which was impacted by the COVID-19 pandemic, in addition to increases in manufacturing and regulatory

headcount to meet current and future demand.

The increase in professional fee expenses of $110,000

in the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to increased regulatory legal expenses

and expenses related to field and regulatory compliance studies.

The increase in other research and development

expenses of $207,000 in the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to increased expenses

related to field and regulatory compliance studies and increased shipping expenses due to higher sales volume during the period.

Facility-related expenses decreased $50,000 for

the six months ended June 30, 2021, compared to the six months ended June 30, 2020, due primarily to the expiration of a facility lease

of 7,632 square feet of manufacturing space in Flagstaff, Arizona at December 31, 2020.

The increase in other research and development expenses of $167,000

in the six months ended June 30, 2021 compared to the same period in 2020 was primarily due to increased expenses related to field and

regulatory compliance studies.

the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, due primarily to the expiration of a facility

lease of 7,632 square feet of manufacturing space in Flagstaff, Arizona at December 31, 2020.

Selling, General and Administrative Expenses

Nine Months Ended

September 30,

(in thousands)

Direct selling, general and administrative expenses:

Personnel related (including stock-based compensation)

Professional fees

Facility-related

Total selling, general and administrative expenses

Selling, general and administrative expenses were

approximately $3.4 million for the six months ended June 30, 2021, as compared to approximately $3.5 million for the six months ended

June 30, 2020.

The decrease of $100,000 in selling, general and administrative expenses was primarily due to a decrease of $357,000 in

professional service expenses and a decrease in transfer agent fees of $62,000 offset by an increase of $267,000 in net salary costs,

$31,000 in marketing programs and $27,000 of travel and entertainment expenses.

The decrease in professional services expenses was primarily

due to reduced legal expenses related to a litigation settlement incurred in the six months ended June 30, 2020 that were not incurred

in the same period of 2021.

The $62,000 decrease in transfer agent fees in the six months ended June 30, 2021 over the same period of

2020 was due to expenses related to a 20-for-1 reverse stock split effected by the Company in February 2020.

The increase in net salary

costs of $267,000 was due primarily to incentive bonuses to employees of $130,000 in May 2021, severance expense for the elimination of

in-house marketing programs in June 2021, $40,000 of increased stock compensation due to the issuance of certain common stock option awards

and the hiring of the Chief Strategy Officer in May 2021.

The $31,000 increase in marketing expenses is a result of costs associated with

rebranding activities to highlight the commercial focus of the Company and on-line marketing program expansion in the six months ended

June 30, 2021.

The $27,000 increase in travel expenses was a direct result of eased COVID-19 travel restrictions that were put in place

at the end of March 2020.

approximately $5.2 million for the nine months ended September 30, 2021, as compared to approximately $5.0 million for the nine months

ended September 30, 2020.

The increase of $200,000 in selling, general and administrative expenses was primarily due to an increase of

$455,000 in net salary costs, offset by a decrease of $283,000 in professional service expenses, a decrease in other selling, general

and administrative expenses of $28,000 and a decrease in facility related expenses of $11,000.

The increase in net salary costs of $455,000 was

due primarily to recognition of incentive compensation expense for employees of $362,000, severance expense of $40,000 for the elimination

of in-house marketing program headcount in June 2021 and increased stock compensation due to the issuance of certain common stock option

awards of $53,000 in the nine months ended September 30, 2021.

The $283,000 decrease in professional services

expenses for the nine months ended September 20, 2021 over the nine months ended September 30, 2020 was primarily due to reduced legal

expenses related to a litigation settlement incurred in the nine months ended September 30, 2020 that were not incurred in the same period

of 2021, partially offset by an increase in professional services expenses relating to legal patent registration filings in the nine months

ended September 30, 2021 that were not incurred in the same period of 2020.

The $28,000 decrease in other selling, general

and administrative expenses for the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to $34,000

of increased marketing expenses is a result of costs associated with rebranding activities to highlight the commercial focus of the Company

and on-line marketing program expansion and increase in travel expenses as a direct result of eased COVID-19 travel restrictions that

were put in place at the end of March 2020, offset by a $62,000 decrease in transfer agent fees in the nine months ended September 30,

2021 over the same period of 2020 was due to expenses related to a 20-for-1 reverse stock split effected by the Company in February 2020.

The decrease in facilities related expenses of

$11,000 for the nine months ended September 30, 2021 over the same period in 2020 is a direct result of the expiration of a facility lease

of 7,632 square feet of manufacturing space in Flagstaff, Arizona at December 31, 2020.

Interest Income/Expense, Net

We recorded interest expense, net of $5,000 for

the six months ended June 30, 2021, as compared to interest expense, net of $13,000 for the same period in 2020.

The $8,000 decrease in

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

after June 30, 2020.

the nine months ended September 30, 2021, as compared to interest expense, net of $20,000 for the same period in 2020.

The $15,000 decrease

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

during 2020 and increased interest income as a result of higher investments in cash invested in money market accounts..

Paycheck Protection Program Loan Forgiveness

PPP loan forgiveness income for the six months

ended June 30, 2021 represents the forgiveness of a promissory note pursuant to the PPP under the CARES Act that the Company secured under

this program.

PPP loan forgiveness income for the nine months

ended September 30, 2021 represents the forgiveness of a promissory note pursuant to the PPP under the CARES Act that the Company secured

under this program.

Other Income (Expense)

Other income, net, was $22,000 for the six months

ended June 30, 2021 as compared to $18,000 for the period ended June 30, 2020.

Other income, net for the six months ended

June 30, 2021 primarily represented a payroll benefits accrual from 2019 that was reversed as the liability period had expired.

other income, net for the six month period ended June 30, 2020 represented recognized gains on the sale of fixed assets during the period.

Other income, net, was $22,000 for the nine months

ended September 30, 2021 as compared to $18,000 for the period ended September 30, 2020.

Other income, net for the nine months

ended September 30, 2021 primarily represented a payroll benefits accrual from 2019 that was reversed as the liability period had expired.

The $18,000 other income, net for the nine month period ended September 30, 2020 represented recognized gains on the sale of fixed assets

during the period.

Liquidity and Capital Resources

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and debt financing, consisting primarily of convertible notes.

Through June 30, 2021, we have received net proceeds

of $89.3 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other promissory

notes, an aggregate of $1.7 million from licensing fees and an aggregate of $1.2 million in net product sales.

As of June 30, 2021, we

had an accumulated deficit of $107.8 million and cash and cash equivalents of $13.1 million.

Through September 30, 2021, we have received net

proceeds of $89.3 million from our sales of common stock, preferred stock and warrant exercises and issuance of convertible and other

promissory notes, an aggregate of $1.7 million from licensing fees and an aggregate of $1.4 million in net product sales.

As of September

30, 2021, we had an accumulated deficit of $110.0 million and cash and cash equivalents of $11.1 million.

As discussed in Note 8 - Borrowings, of our Notes

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and (vi) our ability to meet our working capital needs.

Based upon our current operating plan, we expect

that cash and cash equivalents at June 30, 2021, in combination with anticipated revenue and additional sales of our equity securities,

will be sufficient to fund our current operations for at least the next 12 months.

Based upon our current operating plan, we expect that cash and

cash equivalents at September 30, 2021, in combination with anticipated revenue and additional sales of our equity securities, will

be sufficient to fund our current operations for at least the next 12 months.

We have evaluated and will continue to evaluate our

operating expenses and will concentrate our resources toward the successful commercialization of ContraPest in the United States.

if anticipated revenue targets and margin targets are not achieved or expenses are more than we have budgeted, we may need to raise additional

financing before that time.

If we need more financing, including within the next 12 months, and we are unable to raise necessary capital

through the sale of our securities, we may be required to take other measures that could impair our ability to be successful and operate

as a going concern.

In any event, we may require additional capital in order to fund our operating losses and research and development

activities before we become profitable and may opportunistically raise capital.

We may never achieve profitability or generate positive

cash flows, and unless and until we do, we will continue to need to raise capital through equity or debt financing.

If such equity or

debt financing is not available at adequate levels or on acceptable terms, we may need to delay, limit or terminate commercialization

and development efforts or discontinue operations.

However, if anticipated revenue targets and margin targets are not achieved or expenses are more than we have budgeted, we may need

to raise additional financing before that time.

If we need more financing, including within the next 12 months, and we are unable to

raise necessary capital through the sale of our securities, we may be required to take other measures that could impair our ability

to be successful and operate as a going concern.

In any event, we may require additional capital in order to fund our operating

losses and research and development activities before we become profitable and may opportunistically raise capital.

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

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Work to maximize market acceptance for, and generate sales of, our products;

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

Ramp up of our sales, marketing, advertising and distribution expenses of ContraPest and any other product candidates for which we may receive regulatory approval;

Continue the development of ContraPest and our other product candidates, including engaging in any necessary field studies;

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uses of cash for each of the periods presented:

Six Months Ended

Nine Months Ended

September 30,

Cash used in operating activities

Cash (used in) provided by investing activities

Cash used in investing activities

Cash provided by financing activities

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Operating Activities .

During the six months ended June 30, 2021, operating activities used

$4.0 million of cash, primarily resulting from our net loss of $3.5 million, changes in our operating assets and liabilities of $317,000

and by non-cash charges of $163,000, 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 six months ended June 30, 2021 of $317,000 consisted primarily of a net decrease in accrued

expenses and accounts payable of $51,000, an increase in prepaid expenses of $203,000, an increase in inventory of $24,000 and an increase

in accounts receivable of $49,000, offset by a decrease in other assets of $10,000.

During the six months ended June 30, 2020, operating activities used

$3.6 million of cash, primarily resulting from our net loss of $4.0 million and by changes in our operating assets and liabilities of

$48,000, offset by non-cash charges of $421,000, consisting primarily of stock-based compensation, depreciation and amortization.

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 six months

ended June 30, 2020, consisted primarily of a net decrease in accrued expenses and accounts payable of $181,000 and an increase in prepaid

expenses of $27,000 offset by a decrease in inventory of $45,000, a decrease in receivables of $104,000 and a decrease in other assets

During the nine months ended September 30, 2021,

operating activities used $6.0 million of cash, primarily resulting from our net loss of $5.8 million, changes in our operating assets

and liabilities of $387,000, offset by non-cash charges of $128,000, consisting primarily of stock-based compensation, depreciation and

amortization and by the Paycheck Protection Program loan forgiveness during the period.

Our net loss was primarily attributable to research

and development activities and our selling, general and administrative expenses, as we generated limited product revenue during the period.

Net cash used by changes in our operating assets and liabilities for the nine months ended September 30, 2021 of $387,000 consisted primarily

of an increase in prepaid expenses of $403,000, an increase in inventory of $62,000 and an increase in accounts receivable of $54,000,

offset by a net increase in accrued expenses and accounts payable of $121,000 and a decrease in other assets of $11,000.

During the nine months ended September 30, 2020,

operating activities used $5.5 million of cash, primarily resulting from our net loss of $5.9 million and by changes in our operating

assets and liabilities of $285,000, offset by non-cash charges of $654,000, consisting primarily of stock-based compensation, depreciation

and amortization.

Our net loss was primarily attributable to research and development activities and our selling, general and administrative

expenses, as we generated limited product revenue during the period.

Net cash used by changes in our operating assets and liabilities

for the nine months ended September 30, 2020, consisted primarily of a net decrease in accrued expenses and accounts payable of $460,000

and an increase in prepaid expenses of $24,000 offset by a decrease in inventory of $78,000, a decrease in receivables of $119,000 and

a decrease in other assets of $2,000.

Investing Activities.

For the six months ended June 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.

For the six months ended June 30, 2020, net cash

provided by investing activities was $44,000 due to the sale of property and equipment.

For the nine months ended September 30, 2021,

net cash used in investing activities was $83,000 due to the purchases of property, plant and equipment and increases in construction

in progress of $84,000, offset by proceeds on sale of property and equipment of $1,000.

For the nine months ended September 30, 2020, net cash used in investing activities was $4,000 due to the sale of property and equipment

of $44,000, offset by purchases of property, plant and equipment and construction in progress of $40,000.

Financing Activities.

During the six months ended June 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

During the nine months ended September 30, 2021,

net cash provided by financing activities was $13.6 million as a result of $12.4 million in net proceeds from the issuance of common stock

and net proceeds of $1.2 million from the exercise of warrants, offset by $40,000 related to payments of finance lease obligations, $36,000

related to repayments of notes payable and $17,000 for the payment of employee withholding taxes related to share based awards.

During the six months ended June 30, 2020, net

cash provided by financing activities was $6.3 million as a result of $5.7 million in net proceeds from the issuance of common stock and

net proceeds of $646,000 from the issuance of a promissory note pursuant to the Paycheck Protection Program, offset by $29,000 of repayments

During the nine months ended September 30, 2020,

net cash provided by financing activities was $6.3 million as a result of $5.7 million in net proceeds from the issuance of common stock

and net proceeds of $646,000 from the issuance of a note pursuant to the Paycheck Protection Program, offset by $44,000 of repayments

related to notes payable and $62,000 in repayments of finance lease obligations.

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Revenue Recognition

Effective January 1, 2018, the Company

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

Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and

contracts to perform pilot studies by applying the following steps:

Effective January 1, 2018, the Company adopted

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

Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform

pilot studies by applying the following steps:

(1) identify the contract with a customer;

(2) identify the

performance obligations in the contract;

(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;

(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

Under ASC 605, revenue is recognized when the following criteria are met:

(1) persuasive evidence of an

arrangement exists;

(2) the performance of service has been rendered to a customer or delivery has occurred;

(3) the amount of the

fee to be paid by a customer is fixed and determinable;

and (4) the collectability of the fee is reasonably assured.

The performance

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

obligation determination under ASC Topic 605, Revenue Recognition .

For the comparative periods, revenue has not been adjusted and

continues to be reported under ASC 605 — Revenue Recognition (“ASC 605”) .

Under ASC 605, revenue is recognized

when the following criteria are met:

(1) persuasive evidence of an arrangement exists;

(2) the performance of service has been rendered

to a customer or delivery has occurred;

(3) the amount of the fee to be paid by a customer is fixed and determinable;

and (4) the collectability

of the fee is reasonably assured.

The performance obligations identified by the Company under ASC 606 are straightforward and similar

to the unit of account and performance obligation determination under ASC Topic 605, Revenue Recognition .

The Company recognizes revenue when product is

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We recorded stock-based compensation expense of

approximately $182,000 and $140,000 for the three months ended June 30, 2021 and June 30, 2020, respectively, and approximately $337,000

and $291,000 for the six months ended June 30, 2021 and June 30, 2020, respectively.

We expect to continue to grant stock options and

other equity-based awards in the future and continue to recognize stock-based compensation expense in future periods.

approximately $214,000 and $162,000 for the three months ended September 30, 2021 and September 30, 2020, respectively, and approximately

$550,000 and $453,000 for the nine months ended September 30, 2021 and September 30, 2020, respectively.

We expect to continue to grant

stock options and other equity-based awards in the future and continue to recognize stock-based compensation expense in future periods.

The Black-Scholes option-pricing model requires

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Research and development

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Total stock-based compensation expense

The intrinsic value of stock options outstanding as of June 30, 2021

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

Emerging Growth Company Status

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis