What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-17 compared with 2022-03-29 · 157 added, 445 removed, 18 unchanged (97% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial

statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.

In addition to historical financial information,

the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve

risks and uncertainties.

Our actual results and the timing of events could differ materially from those discussed in the forward-looking

Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report

on Form 10-K, particularly in the sections of this report titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking

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.

of December 31, 2021, we had received net proceeds of $84.3 million from our sales of common stock, preferred stock and issuance of convertible

and other promissory notes, an aggregate of $1.7 million from research grants and licensing fees and an aggregate of $1.5 million in

product sales.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.

In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties.

Our actual results and the timing of events could differ materially from those discussed in the forward-looking statements.

Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the sections of this report titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

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 December 31, 2022, we had received net proceeds of $84.3 million from our sales of common stock, preferred stock and issuance of convertible and other promissory notes, an aggregate of $1.7 million from research grants and licensing fees and an aggregate of $2.5 million in product sales.

At December 31, 2022, we had an accumulated deficit of $122.2 million and cash and cash equivalents of $4.8 million.

April 15, 2020, we also received cash proceeds of $645,700 from the Paycheck Protection Program (or “PPP”) of the Coronavirus

Aid, Relief, and Economic Security Act (“CARES Act”).

We used the proceeds from the PPP Loan to retain employees, maintain

payroll and make lease, interest and utility payments.

On June 18, 2021, the Company received notification from BMO Harris Bank National

Association as the lender in a promissory note pursuant to the CARES Act, that such loan was forgiven in full under the terms of the

have incurred significant operating losses every year since our inception.

Our net losses were $8.3 million and $8.4 million for the

years ended December 31, 2021 and 2020, respectively.

We expect to continue to incur significant expenses and generate operating losses

for at least the next 12 months.

will need additional funding to continue to fund our operations, achieve profitability and become cash flow positive, we will continue

to seek additional financing.

If such equity or debt financing is not available at adequate levels or on acceptable terms, we may need

to delay, limit or terminate commercialization and development efforts or discontinue operations.

it is difficult to measure the effect and impact of the COVID-19 pandemic on revenue for the years ended December 31, 2021 and December

31, 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.

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.

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.

have historically utilized, and intend to continue to utilize, various forms of stock-based awards in order to hire, retain and motivate

talented employees, consultants and directors and encourage them to devote their best efforts to our business and financial success.

In addition, we believe that our ability to grant stock-based awards is a valuable and necessary compensation tool that aligns the long-term

financial interests of our employees, consultants and directors with the financial interests of our stockholders.

As a result, a significant

portion of our operating expenses includes stock-based compensation expense.

Stock-based compensation expense has been, and will continue

to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy.

Specifically, our stock-based compensation expense for the year ended December 31, 2021 and December 31, 2020 was $0.8 million and $0.6

million, respectively, which represented 8.3% and 8.1%, respectively, of our total operating expenses for those periods.

of our Results of Operations

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 years ended December 31, 2021 and December 31, 2020.

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.

of sales consist primarily of cost of products sold, including scrap and reserves for obsolescence.

We continue to focus on improving

our cost structure, with the goals of shifting resources to commercialization, significantly reducing our year-over-year burn rate and

achieving a 50% or greater gross margin.

Steps have included relocating to more cost-efficient space, organizational restructuring, improving

our manufacturing and supply processes and reducing staffing.

and Development Expenses

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 and other

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

expense research and development costs as incurred.

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 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.

General and Administrative Expenses

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.

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

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 the year ended December

31, 2021, other income also included the reversal of a payroll benefits accrual from 2019 that was reversed as the liability period had

tax assets and liabilities are determined based on differences between the financial statement and tax basis of assets and liabilities,

as well as a consideration of net operating loss and credit carry forwards, using enacted tax rates in effect for the period in which

the differences are expected to impact taxable income.

A valuation allowance is established, when necessary, to reduce deferred tax assets

to the amount that is more likely than not to be realized.

The Company’s effective tax rate for the years ended December 31, 2021

and December 31, 2020 has been affected by the valuation allowance on the Company’s deferred tax assets.

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, 2021, the Company has federal and state net operating

loss carryforwards of approximately $77.2 million and $63.7 million, respectively, not considering any potential Internal Revenue Code

of 1986 (“IRC”) Section 382 annual limitation discussed below.

The federal loss carryforwards begin to expire in 2029, unless

previously utilized.

The state loss carryforwards expire in 2041, 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 od 1986, and similar state tax provisions due to ownership change limitations that have occurred previously or that could

occur in the future.

These ownership changes limit the amount of net operating loss carryforwards and other deferred tax assets that

can be utilized to offset future taxable income and tax, respectively.

In general, an ownership change, as defined by Section 382 and

results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more

than 50 percent points over a three-year period.

The Company has not conducted an analysis of an ownership change under section 382.

To the extent that a study is completed and an ownership change is deemed to occur, the Company’s net operating losses could be

the quarter ended June 30, 2021, the Company received notification that a loan to the Company under the Paycheck Protection Program (the

“PPP”) in the amount of approximately $646 thousand was forgiven in full pursuant to the PPP program under the Coronavirus

Aid, Relief, and Economic Security Act (the “CARES Act”).

Section 1106(i) of the CARES Act specifically requires taxpayers

to exclude canceled indebtedness from PPP loans from gross income, and accordingly, the debt forgiveness amount is nontaxable to the

Subsequent to the passage of the CARES Act, the IRS issued Notice 2020-32, which precludes a deduction for an expense that

would otherwise be deductible if the payment results in the forgiveness of a loan, thereby preventing entities from claiming a double

tax benefit on the qualifying expenses for PPP loans.

On December 27, 2020, the Consolidated Appropriations Act (“CAA”) was

signed into law, which reverses existing IRS guidance provided in Notice 2020-32 by allowing taxpayers to fully deduct any business expenses,

regardless of whether the expense was paid for using forgiven PPP loan proceeds.

None of the other provisions of the CARES Act or CAA

had a material impact to the Company’s tax accounts.

of the Years December 31, 2021 to 2020

following table summarizes our results of operations for the years ended December 31, 2021 and 2020:

OF OPERATIONS AND COMPREHENSIVE LOSS

thousands, except shares and per share data)

For the Years

Ended December 31,

Grant revenue

Total revenue

On April 15, 2020, we also received cash proceeds of $645,700 from the Paycheck Protection Program (or “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

We used the proceeds from the PPP Loan to retain employees, maintain payroll and make lease, interest and utility payments.

On June 18, 2021, the Company received notification from BMO Harris Bank National Association as the lender in a promissory note pursuant to the CARES Act, that such loan was forgiven in full under the terms of the program.

We have incurred significant operating losses every year since our inception.

Our net losses were $9.7 million and $8.3 million for the years ended December 31, 2022 and 2021, 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 to continue to fund our operations, achieve profitability and become cash flow positive, we will continue to seek additional financing.

If such equity or debt financing is not available at adequate levels or on acceptable terms, we may need to delay, limit or terminate commercialization and development efforts or discontinue operations.

While it is difficult to measure the effect and impact of the COVID-19 pandemic on revenue over time, 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 continue to experience delays on certain projects with certain businesses and government entities that have not yet returned to pre-COVID-19 pandemic operations.

We have concerns about distributor, pest control operator, individual consumer, and government entity spending as a result of continued financial strain on certain industries due to the COVID-19 pandemic.

This may delay or impede near term purchases of our products by these potential consumers.

Additionally, 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.

We have historically utilized, and intend to continue to utilize, various forms of stock-based awards in order to hire, retain and motivate talented employees, consultants and directors and encourage them to devote their best efforts to our business and financial success.

In addition, we believe that our ability to grant stock-based awards is a valuable and necessary compensation tool that aligns the long-term financial interests of our employees, consultants and directors with the financial interests of our stockholders.

As a result, a significant portion of our operating expenses includes stock-based compensation expense.

Stock-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy.

Specifically, our stock-based compensation expense for the year ended December 31, 2022 and December 31, 2021 was $0.7 million and $0.8 million, respectively, which represented 7.0% and 8.3%, respectively, of our total operating expenses for those periods.

Results of Operations

The following tables provide financial and operational information to be considered in conjunction with management’s discussion and analysis of results of operations.

The results of operations are as following for the years presented (dollars in thousands):

Years Ended December 31, % Increase (Decrease)

Revenues, net $ 1,019 $ 600 70 %

Cost of sales 555 356 56 %

Gross profit 464 244 90 %

Operating expenses:

2 unchanged sentences

Total operating expenses 10,138 9,178 10 %

Net operating loss

Other income (expense):

Interest income

Interest expense

Payroll Protection Program loan forgiveness

Total other income

Net loss and comprehensive loss

Deemed dividend-warrant price protection-revaluation adjustment

Net loss attributable to common shareholders

Weighted average common shares outstanding - basic and fully diluted

Net loss per common share - basic and fully diluted

Grant revenue for the years ended December 31, 2021 and December 31,

2020 was $24,000and was granted for jobs created and related new employee training in the City of Phoenix, Arizona during the 12 months

ended December 31, 2021 and December 31, 2020.

shown net of sales discounts and promotions, were $576,000 for the year ended December 31, 2021, compared to $258,000 for year ended

December 31, 2020.

Sales increased by $318,000 in 2021 due, in part, to the 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.

While these initiatives

continue to progress, we believe the benefits of these initiatives continue to be impacted by reduced spending by customers due to the

COVID-19 pandemic.

of sales was $356,000, or 61.8% of sales, exclusive of grant revenue for the year ended December 31, 2021, compared to $281,000, or 108.9%

of sales, exclusive of grant revenue for the year ended December 31, 2020.

The increase in cost of sales of $75,000 in 2021 is primarily

due to higher sales volume offset by lower reserves for obsolete product delivery system supplies of $119,000 and higher scrap expense

Without the reserve for delivery system supplies, cost of sales for the year ended December 31, 2020 would have been $162,000,

or 62.8% of sales.

Gross profit for the year ended December 31, 2021 was $244,000, or 42.4%

of sales, compared to a gross profit of $1,000, or less than 1% of sales, for the year ended December 31, 2020.

The increase in gross

profit was primarily due to increased sales and the impact of a reserve for obsolete product delivery system supplies of $119,000 recorded

in the year ended December 31, 2020.

Gross profit for the year ended December 31, 2020 would have been $120,000, or 42.6% of sales, without

this reserve.

and Development Expenses

(in thousands)

Direct research and development expenses:

Loss from operations (9,674) (8,934) 8 %

Other income (expense), net (21) 666 (103) %

Net loss $ (9,695) $ (8,268) 17 %

Revenues, net

Sales, which are net of any discounts and promotions, were $1.0 million for the year ended December 31, 2022, compared to $576,000 for year ended December 31, 2021.

Sales increased by $443,000 in 2022 driven by an increase of $282,000, or 60%, from our e-commerce vertical market, combined with a $161,000, or 28%, increase driven by sales to pest management professionals and zoos and sanctuaries.

Also included in revenues in 2021, was $24,000 of grant revenue for jobs created and related new employee training in the City of Phoenix, Arizona during the year.

Cost of Sales

Cost of sales consist primarily of the cost of products sold, including scrap and reserves for obsolescence and was $555,000, or 54.5% of sales, for the year ended December 31, 2022, compared to $356,000, or 61.8% of sales, exclusive of grant revenue, for the year ended December 31, 2021.

Higher costs of sales is driven by increased sales combined with the modification of our shipping policies in April 2022 to significantly reduce free shipping to customers.

Gross profit for the year ended December 31, 2022 was $464,200, or 45.5%, compared to a gross profit of $244,000, or 42.4%, excluding grant revenue, for the year ended December 31, 2021.

The increase in gross profit was primarily due to increased sales volume, which reflects price increases implemented in April 2022, and the impact related to the significant reduction of free shipping to customers both contributed to the improvement in gross profit margin.

Research and Development Expenses

Research and development expenses are expensed as incurred and consist primarily of costs incurred in connection with the research and development of ContraPest and our other product candidates.

Such costs include the following:

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

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

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

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

Years Ended December 31, Increase

Personnel related, including stock-based compensation $ 996 $ 847 $ 149

1 unchanged sentence

Facility related 108 99 9

Total research and development expenses

and development expenses were $2.0 million for the year ended December 31, 2021, compared to $1.5 million for the year ended December

The $460,000 increase in research and development expenses was primarily due to an increase in manufacturing personnel-related

costs of $243,000, an increase in professional fees of $162,000, a decrease in facility related expenses of $68,000 and an increase in

other research and development expenses of $123,000.

increase 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.

increase in professional fees expenses of $162,000 in the year ended December 31, 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.

Facility-related

expenses decreased $68,000 primarily due to the expiration of a facility lease of 7,632 square feet of manufacturing space in Flagstaff,

Arizona at December 31, 2020 as discussed in Note 13 - Commitments and Contingencies to our financial statements included elsewhere in

this Annual Report on Form 10-K.

year over year increase in other research and development expenses of $123,000 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.

General and Administrative Expenses

(in thousands)

Direct selling, general and administrative expenses:

Depreciation expense 128 258 (130)

Other 343 379 (36)

Total $ 1,859 $ 1,954 $ (95)

Research and development expenses were $1.9 million for the year ended December 31, 2022, compared to $2.0 million for the year ended December 31, 2021.

The $95,000 decrease was primarily driven by lower depreciation expense and lower legal fees related to research and development matters, offset by higher personnel costs, as personnel turnover was higher in 2022 compared to 2021, and higher utility costs related to increased production.

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.

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

Years Ended December 31, Increase

Personnel related, including stock-based compensation $ 3,851 $ 3,940 $ (89)

Professional fees 2,193 1,179 1,014

Marketing 631 584 47

Facility-related 155 156 (1)

Total selling, general and administrative expenses

general and administrative expenses were $7.2 million for the year ended December 31, 2021, compared to $6.4 million for the year ended

December 31, 2020.

The increase of $784,000 in selling, general and administrative expenses was primarily due to an increase of $424,000

in net salary costs, including stock compensation expenses and an increase in other selling, general and administrative expenses of $516,000,

offset by a $139,000 reduction in professional fees and a reduction in facility related costs of $17,000.

salaries and wages for the year ended December 31, 2021 were $424,000 higher than the same period in 2020, primarily due to recognition

of incentive compensation expense for employees of $362,000 and increased stock compensation due to the issuance of certain common stock

option awards of $125,000 offset by net headcount reductions in selling and marketing positions due to hiring delays.

reduction in professional fees was primarily due to reduced legal expenses related to a litigation settlement incurred in the year ended

December 31, 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 year ended December 31, 2021.

increase in other selling, general and administrative expenses of $516,000 from $1.4 million for the year ended December 31, 2020 to

$1.9 million for the year ended December 31, 2021 was primarily due to an increase in marketing expenses of $386,000 as a result of costs

associated with rebranding activities to highlight our commercial focus and continued on-line marketing program expansion, an increase

in travel expenses of $84,000 as a direct result of eased COVID-19 travel restrictions in 2021 that were put in place at the end of March

2020, and an increase in director and officer and other insurance premiums of $75,000, offset by reduced depreciation expense due to

certain assets becoming fully depreciated after December 31, 2020.

decrease in facilities related expenses of $17,000 to $156,000 for the year ended December 31, 2021 from $173,000 for the year ended

December 31, 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.

Income/Expense, Net

recorded $7,000 of interest expense, net for the year ended December 31, 2021, as opposed to interest expense, net of $25,000 for the

year ended December 31, 2020.

The decrease in interest expense, net of $18,000 was a result of reduced interest expense as a result of

finance leases and promissory notes that expired during the year ended December 31, 2021 and increased interest income for the year ended

December 31, 2021 as a result of higher investments in cash invested in money market accounts.

Protection Program Loan Forgiveness

loan forgiveness income for the year ended December 31, 2021 represents the forgiveness of a promissory note pursuant to the PPP under

the CARES Act that we secured under this program

Income (Expense), Net

recorded $21,000 of other income (expense), net for each of the years ended December 31, 2021 and December 31, 2020.

Other income (expense),

net for the year ended December 31, 2021 primarily represented a payroll benefits accrual from 2019 that was reversed as the liability

period had expired.

Other income (expense), net for the year ended December 31, 2020 primarily represented income recognized for gains

on sale of certain fixed assets during the year.

and Capital Resources

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.

December 31, 2021, we had received net proceeds of $84.3 million from our sales of common stock, preferred stock and issuance of convertible

and other promissory notes, an aggregate of $1.7 million from research grants and licensing fees and an aggregate of $1.5 million in

product sales.

Depreciation expense 55 46 9

Other 1,394 1,319 75

Total $ 8,279 $ 7,224 $ 1,055

Selling, general and administrative expenses were $8.3 million for the year ended December 31, 2022, compared to $7.2 million for the year ended December 31, 2021.

The $1.1 million increase was driven by higher professional fees related to legal matters, consulting related to advertising and marketing and recruiting costs related to employee turnover.

Additionally, costs related to software licenses and marketing efforts for digital and social media outlets were higher in 2022 when compared to 2021, which was partially offset by lower costs related to the timing of personnel changes.

In 2022, personnel-related costs includes severance costs of $356,000 related to the termination of the former Chief Executive Officer, while 2021 includes severance-related costs related to certain employee terminations and bonuses.

Other Income (Expense), Net

Other income (expense), net, consists of interest income and expense, as well as any recognized gains or losses related to the sale of fixed assets and other miscellaneous items.

For the year ended December 31, 2022, other expense, net largely consisted of a $28,000 loss realized on the sale of research and development equipment, while other income, net for the year ended December 31, 2021 largely consisted of the PPP loan forgiveness in the amount of $645,700.

Liquidity and Capital Resources

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.

At December 31, 2022, we had an accumulated deficit of $122.2 million and cash and cash equivalents of $4.8 million.

discussed in Note 8 - Borrowings of our Notes to Financial Statements included elsewhere in this Annual Report on Form 10-K, on April

15, 2020, we received cash proceeds of $645,700 from the PPP of the CARES Act.

We used the proceeds from the PPP loan to retain employees,

maintain payroll and make lease, interest and utility payments.

This loan was fully forgiven under terms of the PPP on June 14, 2021.

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;

In April 2020, we received cash proceeds of $645,700 from the PPP of the CARES Act, which we used to retain employees, maintain payroll and make lease, interest and utility payments.

This loan was fully forgiven under terms of the PPP in June 2021.

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 December 31, 2021, 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 12 months.

We have evaluated and will continue to evaluate our operating expenses and

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

However, if anticipated revenue

targets and margin targets are not achieved or expenses are more than we have budgeted, we may need to raise additional financing before

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

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

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.

Funding Requirements

We expect our expenses to continue or increase in connection with our ongoing

activities, particularly as we focus on marketing and sales of ContraPest.

Further, the COVID-19 pandemic will likely continue to delay

the completion of field studies and achievement of sales, which will further increase our need for financing.

In addition, we will continue

to incur costs associated with operating as a public company.

particular, we expect to incur substantial and increased expenses as we:

work to maximize

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

explore strategic partnerships to enable us to penetrate

additional target markets and geographical locations;

manage the infrastructure for sales,

marketing and distribution of ContraPest and any other product candidates for which we may receive regulatory approval;

seek additional regulatory approvals

for ContraPest, including to more fully expand the market and use for ContraPest and, if we believe there is commercial viability,

for our other product candidates;

further develop our manufacturing

processes to contain costs while being able to scale to meet future demand of ContraPest and any other product candidates for which

we receive regulatory approval;

continue product development of

ContraPest and advance our research and development activities and, as our operating budget permits, advance the research and development

programs for other product candidates;

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

believe we will need additional financing to fund these continuing and additional expenses.

following table summarizes our sources and uses of cash for each of the years presented:

Cash used in operating activities

Cash used in investing activities

Cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

the year ended December 31, 2021, operating activities used $7.8 million of cash, primarily resulting from our net loss of $8.3 million,

offset by changes in our operating assets and liabilities of $0.1 million and non-cash charges of $0.4 million.

Our net loss was primarily

attributed to research and development activities and our selling, general and administrative expenses, as we generated limited product

sales and grant revenue during the year.

Net cash generated by changes in our operating assets and liabilities for the year ended December

31, 2021 consisted primarily of a $215,000 increase in accrued expenses and accounts payable and a decrease in other assets of $12,000,

offset by increases in net inventories of $56,000, prepaid expenses of $52,000 and a net increase in accounts receivable-trade of $52,000.

the year ended December 31, 2020, operating activities used $7.1 million of cash, primarily resulting from our net loss of $7.9 million

and changes in our operating assets and liabilities of $0.1 million offset by non-cash charges of $0.9 million.

Our net loss was primarily

attributed to research and development activities and our selling, general and administrative expenses, as we generated limited product

sales and no research grant and licensing revenue during the year.

Net cash used by changes in our operating assets and liabilities for

the year ended December 31, 2020 consisted primarily of a decrease in accrued expenses and accounts payable of $524,000 offset by a decrease

in prepaid expenses of $79,000, a decrease in inventories of $235,000 and a net increase in accounts receivable and other assets of $127,000.

the year ended December 31, 2021, we used $99,000 of cash in investing activities, which consisted of $100,000 for the purchases of property

and equipment, offset by $1,000 of cash received on the sales of property and equipment.

the year ended December 31, 2020, we used $67,000 of cash in investing activities, which consisted of $114,000 for the purchases of property

and equipment, offset by $47,000 of cash received on the sales of property and equipment.

the year ended December 31, 2021, net cash provided by financing activities was $13.6 million as a result of $12.4 million in net proceeds

from the issuance of common stock and $1.3 million in proceeds from warrant exercises, partially offset by $135,000 of repayments related

to notes payable and finance lease obligations.

the year ended December 31, 2020, net cash provided by financing activities was $8.9 million as a result of $5.7 million in net proceeds

from the issuance of common stock, $2.6 million in proceeds from warrant exercises and $646,000 from the issuance of notes payable, partially

offset by $110,000 of repayments related to notes payable, finance lease obligations and payment of employee withholding taxes related

to share-based awards.

Accounting Policies and Significant Judgments and Estimates

financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S.

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

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.

Based upon our current operating plan, we expect that cash and cash equivalents at December 31, 2022, in combination with anticipated revenue and any additional sales of our equity securities, will be sufficient to fund our current operations for at least the next 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.

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 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.

Further, continuing effects of the COVID-19 pandemic may delay the completion of field studies and achievement of sales, which will further increase our need for financing.

In addition, we will continue to incur costs associated with operating as a public company.

In particular, we expect to incur substantial and increased expenses as we:

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

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

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

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

• further develop our manufacturing processes to contain costs while being able to scale to meet future demand of ContraPest and any other product candidates for which we receive regulatory approval;

• continue product development of ContraPest and advance our research and development activities and, as our operating budget permits, advance the research and development programs for other product candidates;

• maintain and protect our intellectual property portfolio;

• 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 believe 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 years presented (in thousands):

Years Ended December 31,

Cash and cash equivalents, beginning of year $ 9,326 $ 3,643

Net cash provided by (used in):

Operating activities (8,577) (7,779)

Investing activities (170) (99)

Financing activities 4,196 13,561

Net change in cash and cash equivalents (4,551) 5,683

Cash and cash equivalents, end of year $ 4,775 $ 9,326

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 2022, net cash flows used in operating activities consisted of our net loss of $9.7 million, offset by changes in our operating assets and liabilities of $191,000 and non-cash charges of $928,000.

Our net loss was primarily attributed to research and development activities and our selling, general and administrative expenses, as we generated limited product sales and grant revenue during the year.

Net cash generated by changes in our operating assets and liabilities consisted primarily of a $188,000 increase in accrued expenses and accounts payable, a $148,000 decrease in net inventories, and a $44,000 increase in deferred revenue, offset by increases of $148,000 in prepaid expenses and $42,000 in accounts receivable.

During 2021, net cash flows used in operating activities consisted of our net loss of $8.3 million, offset by changes in our operating assets and liabilities of $67,000 and non-cash charges of $422,000.

Net cash generated by changes in our operating assets and liabilities consisted primarily of a $215,000 increase in accrued expenses and accounts payable and a $12,000 decrease in other assets, offset by increases of $56,000 in net inventories, $52,000 in prepaid expenses and $52,000 in net accounts receivable.

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.

In 2022, our purchases were $74,000 higher than 2021, slightly offset by an increase of $3,000 in proceeds received on sales of property and equipment.

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

In 2022, net cash provided by financing activities consisted of $4.2 million in net proceeds from the issuance of common stock, partially offset by $32,000 of repayments related to notes payable and finance lease obligations.

In 2021, net cash provided by financing activities consisted of $12.4 million in net proceeds from the issuance of common stock and $1.3 million in proceeds from warrant exercises, partially offset by $93,000 of repayments related to notes payable and finance lease obligations.

Critical Accounting Policies 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.

We evaluate our estimates and assumptions on an ongoing basis.

Our actual results may

differ from these estimates under different assumptions or conditions.

our significant accounting policies are described in more detail in Note 2 — Summary of Significant Accounting Policies to our

financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those

most critical to the judgments and estimates used in the preparation of our financial statements.

January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers

(“ASC 606”) .

Under ASC 606, we recognize revenue from the commercial sales of products, licensing agreements and

contracts to perform pilot studies by applying the following steps:

(1) identify the contract with a customer;

(2) identify the performance

obligations in the contract;

(3) determine the transaction price;

(4) allocate the transaction price to each performance obligation in

the contract;

and (5) recognize revenue when each performance obligation is satisfied.

For the comparative periods, revenue has not been

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

Under ASC 605,

revenue is recognized when the following criteria are met:

(1) persuasive evidence of an arrangement exists;

(2) the performance of service

has been rendered to a customer or delivery has occurred;

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

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

The performance obligations identified by us under ASC 606 are straightforward

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

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.

derive revenue primarily from commercial sales of products, net of discounts and promotions, as well as consulting and implementation

services provided in conjunction with our product deployments.

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.

recorded stock-based compensation expense of approximately $765,000 and $645,000 for the years ended December 31, 2021 and 2020, respectively.

We expect to continue to grant stock options and other equity-based awards, such as restricted stock units, in the future and to continue

to recognize stock-based compensation expense in future periods.

Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, which determine the fair value of stock-based

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.

Our historical share option exercise experience

does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data.

Therefore, we estimate

the expected term by using the simplified method, which calculates the expected term as the average of the time-to-vesting and the

contractual life of the options.

Expected volatility .

volatility is derived from the average historical volatilities of publicly traded companies within our industry that we consider

to be comparable to our business over a period approximately equal to the expected term.

We intend to continue to consistently apply

this process using the same or similar public companies unless circumstances change such that the identified companies are no longer

similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

Risk-free interest rate .

The risk-free interest rate is based on the U.S.

Treasury yield in effect at the time of grant for zero coupon U.S.

Treasury notes

with maturities approximately equal to the expected term.

Expected dividend .

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.

Factors, Assumptions and Methodologies Used in Determining Fair Value of Our Common Stock

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.

assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application

of management’s judgment.

If we had made different assumptions than those used, the amount of our stock-based compensation expense,

net income and net income per share amounts could have been significantly different.

The fair value per share of our common stock for

purposes of determining stock-based compensation expense is the closing price of our common stock as reported on the applicable grant

The compensation cost that has been included in the statements of operations and comprehensive loss for all stock-based compensation

arrangements is as follows:

(In thousands)

Selling, general and administrative expenses

Research and development expense

Total stock-based compensation expense

intrinsic value of stock options outstanding as of December 31, 2021 is $0.

Sheet Arrangements

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

We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:

Inventory Valuation.

We value inventory at the lower of cost or net realizable value.

In addition, we write down any obsolete, unmarketable or otherwise impaired inventory to net realizable value.

The determination of obsolete, or excess inventory requires us to estimate the future demand for our products.

The estimate of future demand is compared to inventory levels to determine the amount, if any, of obsolete or excess inventory.

If actual market conditions are less favorable than those we projected at the time the inventory was written down, additional inventory write-downs may be required.

Inventory valuation is re-evaluated on a quarterly basis.

Stock-Based Compensation.

Stock-based compensation expenses is measured at the grant date, based on the estimated fair value of the award using the Black-Scholes option pricing model for stock options and market price for restricted stock units.

The use of the Black-Scholes option pricing model, requires certain estimates, including expected term of options granted, the method of calculating expected volatilities and the risk-free interest rate used in the option-pricing model.

The resulting calculated fair value of stock options is recognized as compensation expenses over the requisite service period, which is generally the vesting period.

When there are changes to the assumptions used in the option-pricing model, including fluctuations in the market prices of our common stock, there will be variations in the calculated fair value of our

future stock option awards, which results in variation in the stock-based compensation expensed recognized.

Additionally, any modification of an award that increases its fair value will require us to recognize additional expense.

Income Taxes.

We record deferred income taxes for temporary difference between the amounts of assets and liabilities for financial and tax reporting purposes and we record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.

We also regularly conduct a comprehensive review of our uncertain tax positions.

In this regard, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes.

Until these positions are sustained by the taxing authorities, we do not recognize the tax benefit resulting from such positions and report the tax effect for uncertain tax positions in our balance sheets.

Off-Balance Sheet Arrangements

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

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-K

Item 7. Management’s Discussion and Analysis