SENESTECH, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our condensed financial
statements and related notes.



Forward-Looking Statements


The statements contained in this Quarterly Report on Form 10-Q that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. All statements other than
statements of historical facts contained or incorporated herein by reference in
this Quarterly Report on Form 10-Q, including statements regarding our future
operating results, future financial position, business strategy, objectives,
goals, plans, prospects, markets, and plans and objectives for future
operations, are forward-looking statements. In some cases, you can identify
forward-looking statements by terms such as "anticipates," "believes,"
"estimates," "expects," "intends," "suggests," "targets," "contemplates,"
"projects," "predicts," "may," "might," "plan," "would," "should," "could,"
"can," "potential," "continue," "objective," or the negative of those terms, or
similar expressions intended to identify forward-looking statements. However,
not all forward-looking statements contain these identifying words. Specific
forward-looking statements in this Quarterly Report on Form 10-Q include
statements regarding:



? our expectation to pursue regulatory approvals and amendments to

the existing WE registration for ContraPest to expand marketing and

the use of ContraPest, and if ContraPest begins to generate sufficient revenue,

regulatory approvals for additional jurisdictions beyond United States;

? our belief that ContraPest is unique in the pest control industry by attacking

the reproductive systems of male and female rats;

? our belief that our field data shows that ContraPest will result in a

reduction in the rat population;

? our belief that ContraPest is the first and only non-lethal fertility control

EPA approved product for rodent population management;

? our expectation to continue to incur significant expenses and operating losses

in the foreseeable future;

? our expectation that cash and cash equivalents at June 30, 2022in

combination with expected earnings and any additional sales of our shares

securities, will be sufficient to finance our current operations for at least the

the next six to nine months;

? our belief that sales have increased in part due to the continued concentration of our Internet

sales initiatives, a strengthened strategic partnership and collaborations with

distributors and PMPs;

? our belief that the increased commercial activity of our sales organization in the field

    was due in part to the launch of our new Elevate product offering;




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? our plan to continue to use various forms of stock-based compensation

rewards for attracting and retaining qualified employees;

? our expectation that stock-based compensation expense will continue to

represent an important part of our commercial, general and administrative activities

expenses in the foreseeable future;

? our expectation that our expenses will continue or increase in connection with our

ongoing activities, particularly as we focus on the marketing and sales of

ContraPest;

? our expectation to continue to grant stock options and other actions

rewards, such as restricted stock units, in the future and to continue to

recognize stock-based compensation expense in future periods;

? our goal of shifting resources to commercialization, significantly reducing our

year-over-year consumption rate and achievement of a margin of 50% or more;

? federal, state and municipal budgets can delay or impede their ability to do

short-term purchases of our products;

? our belief that the prolonged impact on the suppliers we rely on to purchase

raw material ingredients by the COVID-19 pandemic could impact the future

manufacturing operations;

? our maintenance and obtaining regulatory approval of our products and products

    candidates;

  ? our successful commercialization of ContraPest;

  ? our ability to obtain market acceptance, commercial viability and
    profitability of ContraPest and other products;

? our ability to market our products and build an effective and efficient sales force

    marketing infrastructure to generate significant revenue;

  ? the success of our research and development activities;

? our ability to retain and attract key personnel to develop, operate and grow

    our business;

  ? our ability to meet our working capital needs;



? our estimates or expectations regarding our revenues, cash flows, expenses,

capital requirements and the need for additional financing;

? our belief that if we experience any persistent problems or delays in the

marketing of ContraPest, our past losses and expected future losses

could have an adverse effect on our financial situation and have a negative impact

our ability to finance continuing operations, obtain additional financing in the

future and continue as a going concern;

? our belief that we are potentially subject to concentrations of credit risk in

our accounts receivable;

? our belief that our existing facilities are adequate and meet our current needs

business, manufacturing and research needs;

? our ability, and the time required, to improve our cost structure and our

    margins, and limit our cash burn;

  ? our plans for our business, including for research and development;

? our ability to enter into strategic agreements and achieve the objectives

    results from such arrangements;

  ? the adequacy of our facilities to meet our current needs;

  ? the initiation, timing, progress and results of field studies and other
    studies and trials and our research and development programs;

  ? our belief the claims against us do not have merit and our intention to
    aggressively defend against these accusations;

? our belief that litigation against us is unlikely to materially affect

about our operations;

? our financial performance, including our ability to fund operations; and

? developments and projections regarding our plans, our competitors and our

    industry, including legislative developments and impacts from those
    developments.




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These forward-looking statements are not guarantees of future performance and
involve known and unknown risks, uncertainties and situations that are difficult
to predict and that may cause our own, or our industry's, actual results to be
materially different from the future results that are expressed or implied by
these statements. Accordingly, actual results may differ materially from those
anticipated or expressed in such statements as a result of a variety of factors,
including those discussed in Item 1A-"Risk Factors" of Part I of our Annual
Report on Form 10-K, for the year ended December 31, 2021, filed with the SEC on
March 29, 2022, and those contained from time to time in our other filings with
the SEC. A number of factors could cause our actual results to differ materially
from those indicated by the forward-looking statements. Such factors include,
among others, the following:



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

  ? the successful commercialization of our products;

  ? market acceptance of our products; and

? regulatory approval and regulation of our products and other factors and risks

identified from time to time in our filings with the SECONDincluding this

    Quarterly Report on Form 10-Q.




All forward-looking statements included herein are based on information
available to us as of the date hereof and speak only as of such date. Except as
required by law, we undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date of such statements.
The forward-looking statements contained in or incorporated by reference into
this Quarterly Report on Form 10-Q reflect our views as of the date of this
Quarterly Report on Form 10-Q about future events and are subject to risks,
uncertainties, assumptions and changes in circumstances that may cause our
actual results, performance or achievements to differ significantly from those
expressed or implied in any forward-looking statement. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future events, results, performance or achievements.



We are subject to the information requirements of the Exchange Act, and we file
or furnish reports, proxy statements and other information with the SEC. Such
reports and other information we file with the SEC are available free of charge
at www.senestech.com as soon as practicable after such reports are available on
the SEC's website at www.sec.gov. The SEC's website contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC.



Overview


Since our inception, we have sustained significant operating losses in the
course of our research and development 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 with Neogen. 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. See Note 10 for a
description of our public equity sales.



Through June 30, 2022, we have received net proceeds of $89.6 million from our
sales of common stock, preferred stock and warrant exercises and issuance of
convertible and other promissory notes, an aggregate of $1.7 million from
licensing fees and an aggregate of $2.0 million in net product sales. As of June
30, 2022, we had an accumulated deficit of $117.4 million and cash and cash
equivalents of $5.0 million.



On June 18, 2021, we received notification from BMO Harris Bank National
Association as the lender in a promissory note pursuant to the Paycheck
Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic
Security Act (the "CARES Act"), that a loan to us under this program in the
amount of $645,700 was forgiven in full under the terms of the program. This
loan was originally granted and funded on April 15, 2020.



We have incurred significant operating losses every year since our inception.
Our net losses were $2.6 million and $1.7 million for the three months ended
June 30, 2022 and 2021, respectively, and $4.9 million and $3.5 million for the
six months ended June 30, 2022 and 2021, respectively. We expect to continue to
incur significant expenses and generate operating losses for at least the next
12 months.


Our ultimate success depends upon the outcome of a combination of factors,
including the following: (i) successful commercialization of ContraPest and
maintaining and obtaining regulatory approval of our products and product
candidates; (ii) market acceptance, commercial viability and profitability of
ContraPest and other products; (iii) the ability to market our products and
establish an effective sales force and marketing infrastructure to generate
significant revenue; (iv) the success of our research and development
activities; (v) the ability to retain and attract key personnel to develop,
operate and grow our business; and (vi) our ability to meet our working capital
needs.



                                       26




We will need additional funding in order to continue to fund our operations and
achieve profitability and become cash flow positive and 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 the effect and impact of the COVID-19 pandemic on revenue during the six
months ended June 30, 2022 and June 30, 2021 is difficult to measure, the travel
and other restrictions that started in 2020 resulted in a significant slowdown
in our proof-of-concept field studies and sales efforts. We were able to resume
field studies in some important projects mid-year 2020 and have now resumed
all
projects.


Components of our operating results


Sales


Sales are comprised primarily of sales, net of discounts and promotions, of
ContraPest and related components, to our distributors and customers, as well as
consulting and implementation services provided in conjunction with ContraPest
deployments.



Cost of Sales



Cost of sales consist primarily of cost of products sold, including scrap and
reserves for obsolescence and the cost of freight billed to our customers. We
continue to focus on improving our cost structure, with the goals of shifting
resources to commercialization, significantly reducing our year-over-year burn
rate and achieving a 50% or greater gross margin. Steps have included relocating
to more cost-efficient space, organizational restructuring, and improving our
manufacturing and supply processes and reducing staffing.



Operating Expenses


Research and development costs

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


    ?   employee related expenses, including salaries, related benefits, travel

and stock-based compensation expense for employees engaged in research and

        development functions, including that portion of manufacturing not
        included in cost of goods sold;

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

    ?   facilities, depreciation, unbilled customer freight charges and other
        expenses, which include direct and allocated expenses for rent and
        maintenance of facilities, insurance and supplies.




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We expense research and development costs when incurred.



We continue to investigate other applications of our core technology to other
product candidates and modifications to our existing products to expand
usability, which includes laboratory tests, corporate relationships and academic
collaborations. We also continue to develop our supply chain, particularly
identifying and improving our sourcing of triptolide, a key active ingredient
for our product candidates. At this time, we cannot reasonably estimate the
costs for further development of ContraPest or the cost associated with the
development of any of our other product candidates.



Selling, general and administrative expenses

Selling, general and administrative expenses consist primarily of salaries and
related costs, including stock-based compensation, for personnel in executive,
finance, sales, marketing and administrative functions. Selling, general and
administrative expenses also include direct and allocated facility-related costs
as well as professional fees for legal, consulting, accounting and audit
services.



We plan to continue to utilize various forms of stock-based compensation awards
in order to attract and retain qualified employees. As a result, we anticipate
that stock-based compensation expense will continue to represent a significant
portion of our selling, general and administrative expenses for the foreseeable
future.



Interest Income


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



Interest Expense



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



Other Income (Expense), Net



Other income (expense), net, consists primarily of any recognized gains or
losses related to the sale of fixed assets. In 2021, other income also included
the reversal of a payroll benefits accrual from 2019 that was reversed as the
liability period had expired.



Income Taxes



Deferred tax assets and liabilities are determined based on differences between
the financial statement and tax basis of assets and liabilities, as well as a
consideration of net operating loss and credit carry forwards, using enacted tax
rates in effect for the period in which the differences are expected to impact
taxable income. A valuation allowance is established, when necessary, to reduce
deferred tax assets to the amount that is more likely than not to be realized.
Our effective tax rate for the six months ended June 30, 2022, as well as for
the year ended December 31, 2021, has been impacted by the full valuation
allowance on our deferred tax assets.



Since our inception, we have not recorded any U.S. federal or state income tax
benefits for the net operating losses we have incurred in each year in our
history or for our generated research and development tax credits, due to the
uncertainty regarding our ability to realize a benefit from these tax
attributes. Based on tax return activity through December 31, 2021, we had
federal and state net operating loss carryforwards of approximately $77.2
million and $63.7 million, respectively, not considering any potential Internal
Revenue Code of 1986 ("IRC") Section 382 annual limitation discussed below. We
are accruing additional net operating losses in calendar year 2022, which will
be added to the carryover net operating loss balance once the current year is
completed. The federal loss carryforwards begin to expire in 2029, unless
previously utilized. The state loss carryforwards begin to expire in 2032,
unless previously utilized. Included in the $77.2 million of federal loss
carryforwards are approximately $32.7 million of net operating losses that do
not expire due to the tax law changes promulgated in conjunction with the Tax
Cuts and Jobs Act of 2017.



Additionally, the utilization of the net operating loss carryforwards is subject
to an annual limitation under Section 382 and 383 of the Internal Revenue Code
of 1986, and similar state tax provisions due to ownership change limitations
that have occurred previously or that could occur in the future. These ownership
changes limit the amount of net operating loss carryforwards and other deferred
tax assets that can be utilized to offset future taxable income and tax,
respectively. In general, an ownership change, as defined by Section 382 and 383
results from transactions increasing ownership of certain stockholders or public
groups in the stock of the corporation by more than 50 percent points over a
three-year period. We have not conducted an analysis of an ownership change
under section 382. To the extent that a study is completed and an ownership
change is deemed to occur, our net operating losses could be limited.



During the three months ended June 30, 2021, we received notification that a
loan to us under the Paycheck Protection Program (the "PPP") in the amount of
$646 thousand was forgiven in full pursuant to the PPP program under the
Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Section
1106(i) of the CARES Act specifically requires taxpayers to exclude canceled
indebtedness from PPP loans from gross income, and accordingly, the debt
forgiveness amount is nontaxable to us. Subsequent to the passage of the CARES
Act, the IRS issued Notice 2020-32, which precludes a deduction for an expense
that would otherwise be deductible if the payment results in the forgiveness of
a loan, thereby preventing entities from claiming a double tax benefit on the
qualifying expenses for PPP loans. On December 27, 2020, the Consolidated
Appropriations Act ("CAA") was signed into law, which reverses existing IRS
guidance provided in Notice 2020-32 by allowing taxpayers to fully deduct any
business expenses, regardless of whether the expense was paid for using forgiven
PPP loan proceeds. None of the other provisions of the CARES Act or CAA had a
material impact to our tax accounts.



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The following table summarizes our operating results for the three and six months ended June 30, 2022 and 2021:



                                               For the Three Months               For the Six Months
                                                  Ended June 30,                    Ended June 30,
                                               2022             2021             2022             2021

Sales                                      $        277     $        160     $        472     $        248

Cost of sales                                       141              119              246              169
Gross profit                                        136               41              226               79

Operating expenses:
Research and development                            431              455              947              910
Selling, general and administrative               2,277            1,935            4,184            3,357
Total operating expenses                          2,708            2,390   
        5,131            4,267

Net operating loss                               (2,572 )         (2,349 )         (4,905 )         (4,188 )
Other income (expense):
Interest income                                       1                1                3                3
Interest expense                                      -               (3 )             (1 )             (8 )
Payroll Protection Program loan
forgiveness                                           -              650                -              650
Other income                                          2                1                2               22
Total other income                                    3              649                4              667
Net loss and comprehensive loss            $     (2,569 )   $     (1,700 ) 

($4,901) ($3,521)

Weighted average common shares
outstanding - basic and fully diluted        12,212,701       12,178,754   

12,210,863 10,169,061

Net loss per common share - basic and
fully diluted                              $      (0.21 )   $      (0.14 )   $      (0.40 )   $      (0.35 )



Comparison of the three months ended June 30, 2022 and 2021


Sales



Sales, net of sales discounts and promotions, were $277,000 for the three months
ended June 30, 2022, compared to $160,000 for the same period in 2021. Sales
increased by $117,000 in the three months ended June 30, 2022 due, in part, to
continued focus of our internet sales initiatives, augmenting our existing pull
through sales strategy, where demand from the consumer market encourages, or
pulls, resellers and pest management professionals to offer our products, as
well as enhanced strategic partnerships and collaborations with key distributors
and PMPs. In addition, we saw increased sales activity from our field sales
organization due in part to the launch of our new Elevate product offering.

                                       29





Cost of Sales



Cost of sales was $141,000, or 50.9% of net sales, for the three months ended
June 30, 2022, compared to $119,000, or 74.4% of net sales, for the three months
ended June 30, 2021. The increase in cost of goods sold of $22,000 in 2022 is
primarily due to higher sales volume. The decrease in cost of sales as a
percentage of net sales was primarily due to lower production scrap and
manufacturing process improvement and efficiencies during the three months
ended
June 30, 2022.



Gross Profit



Gross profit for the three months ended June 30, 2022 was $136,000, or 49.1% of
net sales, compared to a gross profit of $41,000, or 25.6% of net sales, for the
same period in 2021. The increase in gross profit was a direct result of the
impact of lower production scrap and continued manufacturing efficiencies as a
result of scale-up activities.



Research and development costs


                                                             Three Months Ended
                                                                  June 30,                Increase
                                                            2022             2021        (Decrease)
                                                                       (in thousands)
Direct research and development expenses:
Personnel related (including stock-based compensation)   $      262       $
     240     $        22
Professional fees                                                57               50               7
Depreciation                                                     33               78             (45 )
Freight                                                          24               21               3
Facility-related                                                 27               26               1
Other                                                            28               40             (12 )
Total research and development expenses                  $      431       $
     455     $       (24 )



Research and development expenses were $431,000 for the three months ended June
30, 2022, compared to $455,000 for the same period in 2021. The $24,000 decrease
in research and development expenses was primarily due to a decrease of $45,000
in depreciation expense and a decrease in other research and development
expenses offset by an increase in personnel-related costs of $22,000, a $7,000
increase in professional fees, a $3,000 increase in freight expense and a $1,000
increase in facility related expenses.



Personnel related expense, including stock-based compensation expense increased
for the three months ended June 30, 2022, relative to the same period of 2021,
due to the full quarter impact of headcount additions made in 2021 to meet
current and future demand.



Professional fees increased for the three months ended June 30, 2022, relative
to the same period of 2021, primarily due to increased consulting expenses
related to field and regulatory compliance studies and increased annual EPA
and
state registrations.


Freight expense, the expense related to unbilled freight charges, increased for
the three months ended June 30, 2022, relative to the same period of 2021,
primarily due to increased product sales volume associated with new customer
acquisition and increased freight rates due to increased fuel surcharges.



Facilities expenses increased $1,000 primarily due to contractual rent increases in our facility leases.



The decrease in other research and development expenses of $12,000 in the three
months ended June 30, 2022 compared to the same period in 2021 was primarily due
to decreased expenses related to field and product improvement studies. We also
continue to develop our supply chain, particularly identifying and improving our
sourcing of key ingredients for our product candidates.



Depreciation expense decreased $45,000 for the three months ended June 30, 2022
over the three months ended June 30, 2021 due to several assets becoming fully
depreciated during the period.



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Selling, general and administrative expenses


                                                            Three Months Ended
                                                                 June 30,                Increase
                                                            2022           2021         (Decrease)
                                                                       (in thousands)

Direct selling, general and administrative expenses: related to personnel (including stock-based compensation) $1,115 $

 1,195     $        (80 )
Professional fees                                               532            270              262
Facility-related                                                 39             39                -
Marketing                                                       162             67               95
Office supplies/IT                                               85             80                5
Insurance                                                       145            118               27
Travel and entertainment                                         60             71              (11 )
Other                                                           139             95               44

Total selling, general and administrative expenses $2,277 $

 1,935     $        342




Selling, general and administrative expenses were approximately $2.3 million for
the three months ended June 30, 2022, as compared to approximately $1.9 million
for the three months ended June 30, 2021. The increase of $342,000 in selling,
general and administrative expenses was primarily due to an increase of $262,000
in professional fees, an $95,000 increase in marketing expenses, a $5,000
increase in office supplies/IT expenses, a $27,000 increase in insurance expense
and an increase in other selling, general and administrative expenses of
$44,000, offset by an $80,000 decrease in personnel related expenses and an
$11,000 decrease in travel and entertainment expenses. The increase in
professional services expenses for the three months ended June 30, 2022 was
primarily due to marketing professional fees associated with outsourcing our
marketing programs. Other marketing expenses increased $95,000 during the three
months ended June 30, 2022 over the same period in 2021 primarily due to
increases in digital marketing advertising. Office supplies/IT expenses were
higher during the three months ended June 30, 2022 over the same period in 2021
primarily due to increased IT support services and increased Directors and
Officers insurance premiums. The decrease in net salary costs of $80,000 for the
three months ended June 30, 2022 over the same period in 2021 was due primarily
to sales salary restructuring effective January 1, 2022. Travel and
entertainment expenses for the three months ended June 30, 2022 were $11,000
lower than the same period in 2021 primarily due to the timing of travel
scheduled for 2022 deferred to the third quarter.



Interest income/expense, net

We recorded interest income, net of $1,000 for the three months ended June 30,
2022, as compared to interest expense, net of $2,000 for the same period in
2021. The $3,000 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, 2021.



Paycheck Protection Program



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 we secured under this program.



Other Income (Expense)


Other income, net, was $2,000 for the three months ended June 30, 2022 compared to $1,000 for the three months ended June 30, 2021. The $1,000 increase in other income, net for the three months ended June 30, 2022 represented an increase in gains on the sale of miscellaneous capital assets.

Comparison of the six months ended June 30, 2022 and 2021


Sales



Sales, net of sales discounts and promotions, were $472,000 for the six months
ended June 30, 2022, compared to $248,000 for the same period in 2021. Sales
increased by $224,000 in the first six months of 2022 due, in part to continued
focus of our internet sales initiatives, augmenting our existing pull through
sales strategy, where demand from the consumer market encourages, or pulls,
resellers and pest management professionals to offer our products, as well as
enhanced strategic partnerships and collaborations with key distributors and
PMPs. In addition, we saw increased sales activity from our field sales
organization due in part to the launch of our new Elevate product offering.

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Cost of Sales


Cost of sales was $246,000, or 52.1% of net sales, for the six months ended June
30, 2022, compared to $169,000, or 68.1% of net sales, for the six months ended
June 30, 2021. The increase in cost of goods sold of $77,000 in 2022 is
primarily due to higher sales volume. The decrease in cost of sales as a
percentage of net sales was primarily due to lower production scrap and
manufacturing process improvement and efficiencies during the six months ended
June 30, 2022.



Gross Profit


Gross profit for the six months ended June 30, 2022 was $226,000, or 47.9% of
net sales, compared to a gross profit of $79,000, or 31.9% of net sales, for the
same period in 2021. The increase in gross profit was a direct result of the
impact of lower production scrap and continued manufacturing efficiencies as a
result of scale-up activities.



Research and development costs


                                                              Six Months Ended
                                                                  June 30,                 Increase
                                                            2022             2021         (Decrease)
                                                                        (in thousands)
Direct research and development expenses:
Personnel related (including stock-based compensation)   $      503       $
     475     $         28
Professional fees                                               148              125               23
Depreciation                                                     79              124              (45 )
Freight                                                          50               32               18
Facility-related                                                 53               46                7
Other                                                           114              108                6
Total research and development expenses                  $      947       $
     910     $         37




Research and development expenses were $947,000 for the six months ended June
30, 2022, compared to $910,000 for the same period in 2021. The $37,000 increase
in research and development expenses was primarily due to an increase of $28,000
in personnel-related costs, a $23,000 increase in professional fees, an $18,000
increase in freight expense, a $7,000 increase in facility related expenses and
$6,000 increase in other research and development expenses, offset by a $45,000
decrease in depreciation expense.



Personnel related expense, including stock-based compensation expense for the
six months ended June 30, 2022 increased, relative to the same period of 2021,
due to an increase in headcount to meet current and future demand.



Professional fees increased for the six months ended June 30, 2022 relative to
the same period of 2021, primarily due to increased consulting expenses related
to field and regulatory compliance studies and increased annual EPA and state
registrations.


Freight charges, charges for unbilled freight charges, increased
$18,000 for the six months ended June 30, 2022 compared to the same period of 2021, mainly due to the increase in product sales volume associated with the acquisition of new customers and the increase in freight rates due to the increase in fuel surcharges.

Facilities expenses increased $7,000 primarily due to contractual rent increases in our facility leases and a slight increase in utility expenses.



The increase in other research and development expenses of $6,000 in the six
months ended June 30, 2022 compared to the same period in 2021 was primarily due
to increased expenses related to field and product improvement studies. We also
continue to develop our supply chain, particularly identifying and improving our
sourcing of key ingredients for our product candidates.



Depreciation expense decreased $45,000 for the six months ended June 30, 2022
over the six months ended June 30, 2021 due to several assets becoming fully
depreciated during the period.



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Selling, general and administrative expenses


                                                             Six Months Ended
                                                                 June 30,               Increase
                                                            2022          2021         (Decrease)
                                                                      (in thousands)
Direct selling, general and administrative expenses:
Personnel related (including stock-based compensation)   $    2,185     $   2,051     $        134
Professional fees                                               900           491              409
Facility-related                                                 78            80               (2 )
Marketing                                                       245           153               92
Office supplies/IT                                              169           149               20
Travel and entertainment                                        106            96               10
Insurance                                                       311           235               76
Other                                                           190           102               88

Total selling, general and administrative expenses $4,184 $3,357 $827




Selling, general and administrative expenses were approximately $4.2 million for
the six months ended June 30, 2022, as compared to approximately $3.4 million
for the six months ended June 30, 2021. The increase of $827,000 in selling,
general and administrative expenses was primarily due to an increase of $134,000
in net salary costs, an increase of $409,000 in professional fees, a $2,000
decrease in facility-related expenses, a $92,000 increase in marketing expenses,
a $20,000 increase in office supplies/IT expenses, a $10,000 increase in travel
and entertainment, a $76,000 increase in insurance expense and an increase in
other selling, general and administrative expenses of $88,000.



The increase in net compensation costs of $134,000 was due primarily to expenses
related to an equity award to our employees as well as an increase in
administrative headcount during the last 6 months of 2021, offset by sales rep
compensation restructuring effective January 1, 2022. The increase in
professional services expenses of $409,000 was primarily due to marketing
professional fees associated with outsourcing our marketing programs. Facility
related expenses were lower during the six months ended June 30, 2022 over the
same period in 2021 due to lower utility costs that were incurred in 2021 to
wind down the Flagstaff facility not incurred in 2022. Other marketing expenses
increased $92,000 during the six months ended June 30, 2022 over the same period
in 2021 primarily due to increases in digital marketing advertising. Office
supplies/IT expenses were higher during the six months ended June 30, 2022 over
the same period in 2021 due to increased IT support services Travel and
entertainment expenses for the six months ended June 30, 2022 were $10,000
higher than the same period in 2021 primarily due to the timing of travel,
incurred in Q-1, 2022. Insurance expenses increased during the six months ended
June 30, 2022 primarily due to increased Directors and Officers insurance
premiums. Other selling and general administrative expenses were $88,000 greater
in the six months ended June 30, 2022 over the same period in 2021 due to a
$12,000 reserve for uncollectable receivables and increased sales promotion and
related expenses during the six months ended June 30, 2022.



Interest Income/Expense, Net



We recorded interest income, net of $2,000 for the six months ended June 30,
2022, compared to interest expense, net of $5,000 for the same period in 2021.
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 were
paid down or expired after June 30, 2021.



Paycheck Protection Program



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 we secured under this program.



Other Income (Expense)



Other income, net was $2,000 for the six months ended June 30, 2022 as compared
to $22,000 for the six months ended June 30, 2021. The $20,000 decrease in other
income was primarily due to the impact of a payroll benefits accrual from 2019
that was reversed in the six months ended June 30, 2021, as the liability period
had expired.


Cash and capital resources

Since our inception, we have sustained significant operating losses in the
course of our research and development activities and commercialization efforts
and expect such losses to continue for the near future. We have generated
limited revenue to date from product sales, research grants and licensing fees
received under a former license. We have primarily funded our operations to date
through the sale of equity securities, including convertible preferred stock,
common stock and warrants to purchase common stock; and debt financing,
consisting primarily of convertible notes.



                                       33




Through June 30, 2022, we have received net proceeds of $89.6 million from our
sales of common stock, preferred stock and warrant exercises and issuance of
convertible and other promissory notes, an aggregate of $1.7 million from
licensing fees and an aggregate of $2.0 million in net product sales. As of June
30, 2022, we had an accumulated deficit of $117.4 million and cash and cash
equivalents of $5.0 million.



Our ultimate success depends upon the outcome of a combination of factors,
including the following: (i) successful commercialization of ContraPest and
maintaining and obtaining regulatory approval of our products and product
candidates; (ii) market acceptance, commercial viability and profitability of
ContraPest and other products; (iii) the ability to market our products and
establish an effective sales force and marketing infrastructure to generate
significant revenue; (iv) the success of our research and development
activities; (v) the ability to retain and attract key personnel to develop,
operate and grow our business; and (vi) our ability to meet our working capital
needs.



Based upon our current operating plan, we expect that cash and cash equivalents
at June 30, 2022, in combination with anticipated revenue and any additional
sales of our equity securities, will be sufficient to fund our current
operations for at least the next six to nine months. We have evaluated and will
continue to evaluate our operating expenses and will concentrate our resources
toward the successful commercialization of ContraPest in the United States.
However, if anticipated revenue targets and margin targets are not achieved or
expenses are more than we have budgeted, we may need to raise additional
financing before that time. If we need more financing, including within the next
six to nine months, and we are unable to raise the necessary capital through the
sale of our securities, we may be required to take other measures that could
impair our ability to be successful and operate as a going concern. In any
event, we may require additional capital in order to fund our operating losses
and research and development activities before we become profitable and may
opportunistically raise capital. We may never achieve profitability or generate
positive cash flows, and unless and until we do, we will continue to need to
raise capital through equity or debt financing. If such equity or debt financing
is not available at adequate levels or on acceptable terms, we may need to
delay, limit or terminate commercialization and development efforts or
discontinue operations.



Additional funding needs



We expect our expenses to continue or increase in connection with our ongoing
activities, particularly as we focus on marketing and sales of ContraPest.. In
addition, we will continue to incur costs associated with operating as a public
company.


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

? work to maximize market acceptance for, and generate sales of, our

products, including conducting field demonstrations with potential prospects

clients;

? explore strategic partnerships to allow us to penetrate additional targets

        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 for more

fully expand the market and use of 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 for 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, to the extent that our operating budget permits, advance

        research and development programs for other product candidates;




    ?   maintain and protect our intellectual property portfolio; and

    ?   add operational, financial and management information systems and
        personnel, including personnel to support our product development and
        commercialization efforts and operations as a public company.



We believe we will need additional funding to fund these ongoing and additional expenses.


                                       34





Cash Flows



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



                                                         Six Months Ended
                                                             June  30,
                                                         2022         2021
Cash used in operating activities                      $ (4,148 )   $ (4,001 )
Cash used in investing activities                          (146 )        (83 )
Cash (used in) provided by financing activities             (32 )     

13,570

(Decrease) net increase in cash and cash equivalents ($4,326) $9,486




Operating Activities.



During the six months ended June 30, 2022, operating activities used $4.1
million of cash, primarily resulting from our net loss of $4.9 million offset by
changes in our operating assets and liabilities of $198,000 and by non-cash
charges of $555,000, consisting primarily of stock-based compensation,
depreciation and amortization and bad debt expense. Our net loss was primarily
attributable to research and development activities and our selling, general and
administrative expenses, as we generated limited product revenue during the
period. Net cash generated by changes in our operating assets and liabilities
for the six months ended June 30, 2022 of $259,000 consisted primarily of an
increase in deferred revenue of $41,000, a net increase in accrued expenses and
accounts payable of $145,000 and a decrease in inventory of $25,000, offset by
an increase in prepaid expenses of $108,000 and an increase in accounts
receivable of $19,000.



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 manufacturing, 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.



Investing Activities.


For the six months ended June 30, 2022the net cash used in investing activities was $146,000 due to acquisitions of property, plant and equipment and construction in progress.



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.



Financing Activities.



During the six months ended June 30, 2022, net cash used by financing activities
was $32,000 as a result of $5,000 of repayments related to notes payable and
$27,000 in repayments of finance lease obligations.



During the 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 and net proceeds of $1.2 million from the exercise
of warrants, offset by $26,000 related to payments of finance lease obligations,
$28,000 related to repayments of notes payable and $17,000 for the payment of
employee withholding taxes related to share based awards.



                                       35




Off-balance sheet arrangements


None.


Critical Accounting Policies and Significant Judgments and Estimates

Our financial statements are prepared in accordance with generally accepted
accounting principles in the United States, or U.S. GAAP. The preparation of our
financial statements and related disclosures requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue,
costs and expenses, and the disclosure of contingent assets and liabilities in
our financial statements. We base our estimates on historical experience, known
trends and events and various other factors that we believe are reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. We evaluate our estimates and assumptions on an
ongoing basis. Our actual results may differ from these estimates under
different assumptions or conditions.



While our significant accounting policies are described in more detail in Note 2
to our financial statements included elsewhere in this Quarterly Report on Form
10-Q, we believe that the following accounting policies are those most critical
to the judgments and estimates used in the preparation of our financial
statements.



Revenue Recognition



Effective January 1, 2018, we adopted Accounting Standards Codification ("ASC")
606 - Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, we
recognize revenue from the commercial sales of products, licensing agreements
and contracts to perform pilot studies by applying the following steps: (1)
identify the contract with a customer; (2) identify the performance obligations
in the contract; (3) determine the transaction price; (4) allocate the
transaction price to each performance obligation in the contract; and (5)
recognize revenue when each performance obligation is satisfied. For the
comparative periods, revenue has not been adjusted and continues to be reported
under ASC 605 - Revenue Recognition ("ASC 605"). Under ASC 605, revenue is
recognized when the following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) the performance of service has been rendered to a
customer or delivery has occurred; (3) the amount of the fee to be paid by a
customer is fixed and determinable; and (4) the collectability of the fee is
reasonably assured. The performance obligations identified by us under ASC 606
are straightforward and similar to the unit of account and performance
obligation determination under ASC Topic 605, Revenue Recognition.



We recognize revenue when product is shipped at a fixed selling price on payment
terms of 30 to 120 days from invoicing. We recognize other revenue earned from
pilot studies, consulting and implementation services upon the performance of
specific services under the respective service contract.



We derive revenue primarily from commercial sales of products, net of discounts
and promotions, as well as consulting and implementation services provided in
conjunction with our product deployments.



Stock-Based Compensation



We recognize compensation costs related to stock options granted to employees
based on the estimated fair value of the awards on the date of grant, net of
estimated forfeitures, in accordance with ASC Topic 718 - Stock Compensation. We
estimate the grant date fair value of the awards, and the resulting stock-based
compensation expense, using the Black-Scholes option-pricing model. The grant
date fair value of stock-based awards is expensed on a straight-line basis over
the vesting period of the respective award.



We recorded stock-based compensation expense of approximately $206,000 and
$182,000 for the three months ended June 30, 2022 and June 30, 2021,
respectively, and approximately $430,000 and $337,000 for the six months ended
June 30, 2022 and June 30, 2021, respectively. We expect to continue to grant
stock options and other equity-based awards in the future and continue to
recognize stock-based compensation expense in future periods.



                                       36





The Black-Scholes option-pricing model requires the use of highly subjective and
complex assumptions, which determine the fair value of stock-based awards. If we
had made different assumptions, our stock-based compensation expense, net loss
and loss per share of common stock could have been significantly different. Our
assumptions are as follows:



    ?   Expected term. The expected term represents the period that the
        stock-based awards are expected to be outstanding. Our historical share
        option exercise experience does not provide a reasonable basis upon which
        to estimate an expected term because of a lack of sufficient data.

Therefore, we estimate the expected term using the simplified method,

which calculates the expected duration as the average of the vesting times

and the contractual life of the options.

? Expected volatility. The expected volatility is derived from the average

historical volatilities of publicly traded companies in our industry

that we consider comparable to our activity over a period

approximately equal to the expected duration. 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 WE

        Treasury yield in effect at the time of grant for zero coupon U.S.
        Treasury notes with maturities approximately equal to the expected term.

? Expected dividend. The expected dividend is assumed to be zero because we have

has never paid dividends and does not currently intend to pay dividends on our

ordinary actions.

? Confiscations expected. We use historical data to estimate pre-acquisition

waivers of options and recognize stock-based compensation expense only for

awards that are expected to vest. To the extent that the actual confiscations

differ from the estimates, the difference will be recorded as a cumulative

        adjustment in the period that the estimates are revised.



Significant factors, assumptions and methodologies used in determining the fair value of our common shares



As noted above, we are required to estimate the fair value of the common stock
underlying our stock-based awards when performing the fair value calculations
using the Black-Scholes option-pricing model.



The assumptions underlying these valuations represent management's best
estimates, which involve inherent uncertainties and the application of
management's judgment. If we had made different assumptions than those used, the
amount of our stock-based compensation expense, net income and net income per
share amounts could have been significantly different. The fair value per share
of our common stock for purposes of determining stock-based compensation expense
is the closing price of our common stock as reported on the applicable grant
date. The compensation cost that has been included in the statements of
operations and comprehensive loss for all stock-based compensation arrangements
is as follows:



                                            Three Months Ended           Six Months Ended
                                                 June 30,                    June 30,
                                           2022            2021          2022          2021

Research and development                 $       3       $       -     $      4       $    2
Selling, general and administrative            203             182         

426,335 Total stock-based compensation expense $206 $182 $430 $337

The intrinsic value of stock options outstanding at June 30, 2022 has been $0.



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