What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-03-17 · 46 added, 54 removed, 121 unchanged (45% of the section changed)

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At December 31, 2023, we had an accumulated deficit of $129.9 million and cash and cash equivalents of $5.4 million.

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.

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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.

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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.

Specifically, our stock-based compensation expense for the year ended December 31, 2023 and December 31, 2022 was $555,000 and $711,000, respectively, which represented 6.7% and 7.0%, respectively, of our total operating expenses for those periods.

Results of Operations

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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.

Sales, which are net of any discounts and promotions, were $1.2 million for the year ended December 31, 2023, compared to $1.0 million for the year ended December 31, 2022.

Sales increased by $174,000 in 2023 driven by more than 70% increases in our agribusiness, commercial and distributor vertical markets, as we continue efforts at commercializing our products, slightly offset by a 10% decrease in e-commerce.

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.

Cost of sales, consisting primarily of the cost of products sold, including scrap and reserves for obsolescence, was $654,000 for the year ended December 31, 2023, compared with $555,000 for the year ended December 31, 2022, an increase of $99,000, or 17.8%.

However, cost of sales as a percent of sales was comparable year over year, at 54.8% for 2023 compared with 54.5% for 2022.

Gross profit for the year ended December 31, 2023 was $539,000 compared with gross profit of $464,000 for the year ended December 31, 2022, an increase of $75,000, or 16.2%.

However, gross profit margin was comparable year over year at 45.2% for 2023 compared with 45.5% for 2022.

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.

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

Such costs include the following:

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Years Ended December 31, Increase

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

Personnel (including stock-based compensation) $ 636 $ 996 $ (360)

Professional fees 156 284 (128)

Facility related 108 99 9

Depreciation expense 128 258 (130)

Facility 122 108 14

Depreciation 109 128 (19)

Other 205 343 (138)

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Research and development expenses were $1.2 million for the year ended December 31, 2023, compared to $1.9 million for the year ended December 31, 2022.

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.

The $631,000 decrease was primarily driven by lower personnel costs and lower legal fees related to research and development matters, offset by higher costs related to increased and expanded product development efforts in the later part of 2023.

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 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)

Personnel (including stock-based compensation) $ 3,440 $ 3,851 $ (411)

Professional fees 1,722 2,193 (471)

Marketing 317 631 (314)

Facility-related 155 156 (1)

Travel and related expenses 228 201 27

Facility 155 155 —

Depreciation expense 27 55 (28)

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Selling, general and administrative expenses were $7.0 million for the year ended December 31, 2023, compared to $8.3 million for the year ended December 31, 2022.

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.

The $1.2 million decrease was driven by lower professional fees related to legal matters, consulting related to advertising and marketing activities and recruiting costs related to employee turnover, partially offset by higher cost in 2023 related to the settlement of a legal matter.

Additionally, costs related to software licenses and marketing efforts for digital and social media outlets were lower in 2023 when compared to 2022, combined with lower costs related to the timing of personnel changes.

In 2023, personnel costs includes severance costs of $191,000 related to the termination of our former Chief Revenue Officer, while 2022 includes severance costs of $356,000 related to the termination of our former Chief Executive Officer.

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.

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

For the year ended December 31, 2023, other income, net largely consisted of interest income of $26,000, while other expense, net for the year ended December 31, 2022 largely consisted of a loss realized on the sale of research and development equipment of $28,000.

Interest income was higher in 2023 when compared with 2022, as interest rates continued to climb throughout 2022 and into 2023, which then leveled off.

Interest expense was also higher in 2023 when compared with 2022 due to new notes entered into to finance the purchase of new manufacturing equipment.

Liquidity and Capital Resources

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

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

While we have generated $1.2 million of revenue in our most recent fiscal year, it is not sufficient to cover our base operating costs.

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;

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At December 31, 2023, we had an accumulated deficit of $129.9 million and cash and cash equivalents of $5.4 million.

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;

(i) successful commercialization of ContraPest and Evolve and maintaining and obtaining regulatory approval of our products and product candidates;

(ii) market acceptance, commercial viability and profitability of ContraPest, Evolve and other products;

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

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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 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.

Based upon our current operating plan, we expect that cash and cash equivalents at December 31, 2023, in combination with anticipated revenue, will be sufficient to fund our current operations for at least the next nine months.

We have evaluated and will continue to evaluate our operating expenses and will concentrate our resources toward the successful commercialization of ContraPest and Evolve in the United States.

However, if anticipated revenue targets and margin targets are not achieved or expenses are more than we have budgeted, we may need to raise additional financing before that time.

If we need more financing, including within the next nine months, and we are unable to raise the necessary capital through the sale of our securities, we may be required to take other measures that could impair our ability to be successful and operate as a going concern.

In any event, we may require additional capital in order to fund our operating losses and research and development activities before we become profitable and may opportunistically raise capital.

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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.

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• 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;

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

• seek additional regulatory approvals, if any, for ContraPest and Evolve, including to more fully expand the market and use for ContraPest and Evolve 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 Evolve and any other product candidates for which we receive regulatory approval;

• continue product development of ContraPest and Evolve 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;

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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 2023, net cash flows used in operating activities consisted of our net loss of $7.7 million and by changes in our operating assets and liabilities of $545,000, offset by non-cash charges of $688,000.

Our net loss was primarily attributed to expenses incurred related to selling, general and administrative as we continue efforts to commercialize our products, as well as research and development activities.

Revenue from our product sales did not cover our operating expenses during the year.

Net cash used by changes in our operating assets and liabilities consisted primarily of a $583,000 decrease in accrued expenses and accounts payable, a $26,000 decrease in deferred revenue;

and a $10,000 increase in prepaid expenses, offset by decreases of $58,000 in inventory and $20,000 in accounts receivable.

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.

Our net loss was primarily attributed to research and development activities and our selling, general and administrative expenses.

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 inventory and a $44,000 increase in deferred revenue, offset by increases of $148,000 in prepaid expenses and $42,000 in 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.

In 2023, our purchases were $25,000 lower than 2022, slightly offset by a decrease of $4,000 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.

In 2023, net cash provided by financing activities largely consisted of $5.4 million of net proceeds from issuances of common stock, $2.8 million from the exercise of warrants, and $114,000 from proceeds from notes payable.

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

Critical Accounting Policies and Estimates

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

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

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.

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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-K

Item 7. Management’s Discussion and Analysis