SenesTech, Inc. Q3 FY2020 Earnings Call

Good day, and welcome to the SenesTech Inc Reports Third Quarter Fiscal Year 2020 Financial Results. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead, sir.

Thank you very much, Cole, and thank you all for joining us today. On today’s call, we will discuss SenesTech’s third quarter 2020 financial results for the period ended September 30, 2020. With us on the call today are Mr. Ken Siegel, the company’s Chief Executive Officer; and Mr. Tom Chesterman, the company’s Chief Financial Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of SenesTech during the course of this conference call may contain 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, and such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in our filings with the Securities and Exchange Commission. All forward-looking statements contained during this conference call speak only as of the date in which they were made and are based on management’s assumptions and estimates as of such date. The company does not undertake any obligation to publicly update any forward-looking statements whether as a result of the receipt of new information, the occurrence of future events or otherwise. With that said, let me turn the call over to Ken Siegel. Ken, please proceed.

Thanks, Robert. Good afternoon. Thank all of you for joining us today. Before I talk about the operating results, let me start with our most recent announcement that we've added three members to the board. It was an interesting and extremely encouraging process. We had intended to recruit only two new board members to replace our former chairperson and to accommodate Julie Williams' desire to take a more passive role. But in the recruitment process, unique and complementary individuals were identified, and in the end, we decided to expand the board to accommodate an additional director. These three have very specific skills to best support the company and our current commercial growth strategies. They all share a passion for our business and recognize the unique value of ContraPest as an effective and sustainable solution to an age-old problem. Phil Grandinetti is Founder and Chief Customer Officer of WITHit, a growth leader in wearable tech accessories, with prior executive sales experience at GSM products and LightWedge. Phil brings a deep background in the commercialization of innovative consumer products and a track record of leading exponential growth. K.C. Kavanagh is the Chief Communications Officer at Bacardi, with prior executive communications experience at Starwood Hotels and Resorts. K.C. has particular expertise in messaging, including strategic, brand, and product messaging, taking complex messages and making them understandable and exciting. Jake Leach is the Chief Technology Officer at Dexcom, a leader in glucose monitoring technology, and is known for pairing technology with an exceptional user experience. This pairing of technology and user experience is expected to have direct relevance to the commercial development and deployment of ContraPest. Although Julie Williams is stepping down from her board role, she will continue to provide her expertise and assistance as a Director Emeritus and Board Observer. As you saw from our press release, we continue to achieve traction during the third quarter in the awareness and deployment of ContraPest, which resulted in a 114% increase in sales over the prior period. Albeit still from a small base, this is the second highest revenue quarter we've achieved over the past seven quarters, as we showed growth on both a sequential and a year-over-year basis. I believe the strategies we are developing to expand the adoption of ContraPest are beginning to work. As the impacts from COVID begin to subside, we will see that begin to be more recognized in our financial results. Clearly, the biggest thing that happened during the quarter was the passage of the California Ecosystems Protection Act of 2020, otherwise known as AB 1788, which will prohibit the use of the four major second-generation anticoagulant rodenticides or SGARs commonly used in rodent pest control under many circumstances. Signed by the governor, the bill will become law effective January 1, 2021. As many of you are aware, we've been discussing the potential passage of this bill for some time now. The bill is intended to address the vulnerability of wildlife to the lethality and environmental persistence of these SGARs used for rodent control. But it also creates a challenge for pest management professionals or PMPs, who incorporate these SGARs into their integrated pest management programs. Absent the use of these SGARs, pest managers will have to rely on other lethal and non-lethal tools. Clearly, ContraPest can be that alternative and complementary non-lethal approach to managing rodents with its proven effectiveness in the field. As has been stated in various public testimony, it's estimated that the current use of rodenticides, with these SGARs being a large share, is worth approximately $100 million of product per year in California alone. So clearly, this is a very large opportunity for SenesTech. So what are we doing to ensure ContraPest can gain adoption in the state of California? As we stated in our press release in late September, we have launched a multi-pronged initiative to drive adoption of ContraPest in California. First, we're engaging with the PMP industry on how ContraPest can be beneficial to their pest management business as they adapt to the removal of SGARs. The first movers in California were in Los Angeles and San Francisco, and we have seen expansion of deployment there, much of which actually predated the passage of AB 1788. Since the passage, we have seen a growing number of inbound inquiries and responses to our outreach efforts from PMPs, who are now facing the reality of integrated pest management without SGARs. We certainly witnessed it at a recent virtual industry conference. We see it in response to our emails and social media posts, and our field salespeople are seeing increased interest from prospective customers when they call. ContraPest can clearly help fill the gap in integrated pest management. As we've stated, in extensive field studies, ContraPest has been shown to reduce rodent populations by 60% to 90% beyond conventional means alone. As PMPs adapt their protocols and practices to the bill, we will work with PMPs to best incorporate ContraPest as they eliminate or limit the use of the now prohibited SGARs. We believe that PMPs will also see that ContraPest can be economically and practically beneficial to their entire practice, not just those affected by the bill. Second, we're expanding our market awareness campaigns to the broader residential consumer, commercial, agribusiness customers, and other bases. This starts with the redesign of our website and our e-commerce platform to make it more consumer-friendly. When we launched the e-commerce platform last year, it was not really optimized for direct-to-consumer, and now it clearly needs to be. This will then be further supported by targeted social media and email campaigns. Along with the passage of AB 1788, ContraPest was added to the reduced risk pesticide list in San Francisco, which now permits ContraPest's expanded use in the city. The Integrated Pest Management Ordinance of San Francisco mandates a pesticide ban and only allows select pesticide products to be used on city-owned properties. The San Francisco reduced risk pesticide list catalogs dose pesticide products approved for use. The San Francisco Department of the Environment performs extensive evaluations when deciding which products to accept to the list, focusing on factors such as efficacy and environmental impact. Products on the list are required to be used with an integrated pest management strategy. The passage of AB 1788 and the addition of ContraPest to the reduced risk pesticide list alone are not windfalls, but there are other opportunities. There's still much work to be done. Our opportunity will be to use these events to reach more and more PMPs and end-user customers and show them that ContraPest is a viable substitute. We will continue the discussion on how ContraPest is a valuable addition to all integrated pest management scenarios. I can assure you that we are hard at work to leverage this opportunity. One other comment on this before I transition. As many of you are aware, many other states tend to follow California's lead. So while this is clearly a very large opportunity, the reality is that the potential banning of SGARs may spread across the country. Again, that in and of itself doesn't create a windfall as there are still other alternatives to treatment, but it does allow for the potential acceleration of the adoption of ContraPest, and we're going to be all over it. While California is obviously very important, our key themes for the long-term success that I laid out for the past few quarters remain the same. So let's spend a minute just touching on each of these and provide updates where I can. First, we began a crash program to obtain the data necessary to show how ContraPest works in real-world situations and to demonstrate both its long-term efficacy and cost-effectiveness. As we discussed last quarter, we have launched several long-term projects that effectively demonstrate the efficacy of ContraPest in real-world applications. As we previously announced, our program in Washington, D.C. demonstrated reductions of between 70% and 87% in rat populations, with those reductions being sustained over time. D.C. will be deploying ContraPest on a widespread basis as their budget permits. We also observed a significant reduction in the ratio of juveniles to adults, which in population biology is considered the harbinger of a population crash. We have similar data, though not as large in scale, from other locales. We can now package this data for sales efforts to other municipalities and governmental entities as clear and compelling proof that ContraPest works in real-world urban environments. Our challenge, however, is that these potential customers are the hardest hit budget-wise from the pandemic. We'll have to wait for the budget pressures to lessen before we're able to make complete inroads into this vertical. As we also previously discussed, our long-term project in the poultry industry is also showing a 50% to 87% reduction in rodent populations with an average sustained reduction of 61%. This project is capable of testing a more efficient and easier-to-use dispensing system that we are also testing in other locations. This new sipper tube structure will shortly be submitted to the EPA for approval, providing our customers another way to address their rodent problems. We believe that this new dispenser will be highly desirable in addressing rat infestations and can significantly expand the usability of ContraPest in many other locations. We hope for EPA approval later next year. Our data shows that in poultry applications, the amount added to the bottom line of an average farm could approach $1 million per year, with annual revenue to us exceeding $50,000 per location. But this isn't the only application in agriculture. There are many other markets in what we refer to as the grain vector. Those agricultural applications where grain loss from rodents is a significant cost of operations. Second, we refocused our sales and marketing efforts to drive pull-through demand and focused our efforts on a set of target verticals that would be most likely to see the benefits of the product and would have the highest value from results. As we discussed last quarter, Steve Kraus has now restructured, restaffed and redirected outside sales to accelerate new account growth and position emerging field efficacy results for sustained growth in key market verticals. We now have four regional sales professionals fully trained and targeted within their regions. Third, as part of our marketing efforts, we launched an e-commerce platform that allows us to sell directly to consumers, enabling us to get our product to individuals and companies that are eager to deploy ContraPest without a PMP, while also creating another source of demand for PMPs. This continues to be a growing channel for us and one that we will continue to invest in selectively and prudently. Fourth, we repositioned ContraPest as part of an overall integrated pest management strategy. We emphasized that while ContraPest could certainly be used as a single solution in environmentally sensitive situations, it was even more highly effective as part of an integrated approach. From a positioning standpoint, we recognized last year that attempting to position ContraPest as an exclusive solution to pest control was alienating our potential PMP customers and other major players in the industry. Sustainable control requires the use of multiple pest management tools. Since then, we've been strongly emphasizing the important role that ContraPest can and does play as part of a broader IPM solution. It can dramatically improve the effectiveness of other tools and generate sustained results. Because ContraPest is a contraceptive and not a sterilant, PMPs can enhance their business models by providing a long-term solution that enables them to significantly reduce their servicing costs. We're now finalizing real-world business cases that our sales and marketing team can use to demonstrate to both PMPs and end-users the high value of including ContraPest as part of their IPM programs. Fifth, we refocused our R&D efforts towards making the product more user-friendly and available for use in increasing numbers of applications. We currently have three efforts in this area. First, the addition of mice to the label. We have begun the submission process with the EPA and expect, assuming approval, to be able to take a revised label to the states and to the markets by mid-year next year. Second, new dispensers. This was a key learning from the poultry product that a new dispenser was necessary. We now have finished the design of one that works well, and we will be submitting it to the EPA shortly. Third, non-liquid bait. This is something that we hear requested from potential customers, and we have talked about it before. It may not be something that we can do or should do alone. We are in discussions with a more experienced partner in non-liquid formulas and hope to announce progress in this area within the next quarter. Finally, we stopped chasing every shiny object that came along and concentrated on those areas and opportunities most likely to bring near-term success while maintaining financial discipline. Tom will talk about that more in his remarks. So in closing, while we are increasingly focusing efforts within California, we continue to make progress on other key initiatives set forth at the beginning of the year to drive long-term adoption of ContraPest. These include finalizing data sets within key industries, including poultry and municipal areas, driving pull-through demand through a refocused sales and marketing program as well as direct sales efforts through our e-commerce platform. We continue to efficiently manage the business. As budgets become less encumbered by the effects of COVID-19, we believe these efforts, coupled with our repositioning of ContraPest as a component of an overall integrated pest management strategy will increasingly gain traction. With that, let me turn it over to Tom for a look at the numbers.

Thank you, Ken. Just as a reminder for our listeners and investors, we will be filing our 10-Q within a day or two with all of the detail. So right now, we'll just limit ourselves to the summary numbers. Revenue for the quarter was $77,000 compared with $71,000 last quarter and $36,000 in the third quarter of 2019. As activity in this industry tends to be seasonal, this represents an impressive growth rate of over 100%, but from a small base, of course. Over one-third of the revenue is coming in from California right now, which we expect to continue to grow with the passage of the bill, as Ken mentioned in our current sales focus. Revenues continue to be a mixture of distributor sales, PMP direct, and direct-to-consumer. I should note that we can't always tell the difference between PMP direct and direct-to-consumer as the PMPs can and do order from the website just as consumers do. We think that revenues, particularly to the municipal customers, might have been higher if not for the budgetary issues COVID-19 has placed on their operations, but it's very difficult to confirm or calculate precisely. Moving to costs and expenses. Cost of goods sold has improved significantly over last year. This trend has been driven by a variety of initiatives: less scrap, larger batch sizes, and improved raw material handling. Our goal is to get to a gross margin of 50% or better, and we are on track to achieving that. While on manufacturing, our relocation to our new space in Phoenix is nearly complete. We probably won't get to full production there until the end of the year, but we have restarted limited production already. Operating expenses were $1.9 million in the quarter, a significant reduction versus $2.6 million in the third quarter of 2019 and a fairly insignificant increase over the second quarter. As we've discussed, our goal was and is to take $1 million out of OpEx compared to last year while still spending as needed to support top-line growth. As of the year-to-date, we have achieved that with a nine-month OpEx down $1.3 million. Our adjusted EBITDA, which we think is a useful measurement of net operating performance, was a $1.7 million loss for the quarter, up slightly from the second quarter, but still much improved year-to-date versus last year due to the reduction in OpEx I just mentioned. Moving on to another essential topic, cash. We had a significant subsequent event of a financing. Earlier this month, we had a significant warrant inducement with an existing investor. In this, we raised a net $2.6 million. When added to cash at the end of the quarter, this implies total cash on hand of $5.3 million. At our current burn rate, this provides us the needed capital to or beyond mid-year next year. While this is enough for now, I will reiterate that we still need further capital at some point. We will continue to assess the capital markets and act opportunistically as needed and appropriate. With that, let me open up the lines for questions from our investors. Operator, please open.

And our first question today will come from Pete Enderlin with Maz Partners. Please go ahead.

I have a significant question regarding the strategic shift from ContraPest being a replacement for what you might call the PMP's legacy programs. As you mentioned, there is a perception that ContraPest poses a competitive threat to those legacy programs and is now part of integrated pest management. I'm curious about how the PMPs plan to integrate ContraPest with their existing tools, as Ken referred to, and what those other tools will be alongside ContraPest.

Great question, Pete. There are several different methods they use. Some are lethal, like traps and poisons. There's also exclusion, which ensures that pests don't return, along with various other methods. We essentially tell them they can keep using their current methods, which will help reduce the pest population, especially if they continue applying lethal methods. However, we can show them that once they achieve a reduction, they can use ContraPest either at the same time or right after, which will further decrease the population by an additional 60% to 90%. The key point is that it will maintain that reduced level. Traditional methods often lead to the pests returning after three to six months. In contrast, this method not only reduces the population but keeps it low. While it won't completely eliminate rodents, it keeps their numbers very low and sustainable. We also tell the pest management professionals (PMPs) that instead of their usual episodic approach—coming in once per month and then six months later—they should look at continuing to deploy ContraPest, as it’s a contraceptive rather than a sterilant. This enhances their business model by creating a recurring revenue stream since there will be fewer rodents consuming it. Additionally, customers will be happier because they won’t have to deal with major knockdowns or cleanouts, which leads to lower service and labor costs. We believe this is very compelling. Moreover, as some of their traditional tools are being phased out, it shifts from being just an appealing option to a necessity. Initially, they were worried about two things: that adopting this would mean overhauling their existing business practices, and that eliminating the rat population would threaten their business. We’ve shown them that it can integrate into their programs, enhance them, and ultimately improve their business model.

Okay. And under California's 1788, are there still other rodenticides, not the anticoagulant type, but others that they can continue to use?

Yes. There are other rodenticides that they can use. There are certainly first-generation anticoagulants. There are also others that have a different mechanism of action, some of which are known to be less effective, and some of which are actually known to be more dangerous. So there are some other possibilities that they can use. That's one of the reasons why we really have to see this as an opportunity to show the advantages of ContraPest as they also look at those other alternatives.

Right. But then how do they achieve the initial knockdown? Some of these other rodenticides are less effective or maybe more dangerous in some ways. I mean, you could still have scavengers and predators eating dead rats with poison in them.

Yes. That is very definitely an issue. Some of them will actually move to trapping and other trapping-like activities that can also achieve that. The disadvantage of that is that they are more labor-intensive. It really then behooves them to put as much ContraPest in as possible to augment those and bring down those labor costs.

Do any of those very active PMPs in California use the dry ice method of eliminating them on an initial go-around? Or is that typically only used in New York City?

We have anecdotal information from one PMP that they have booked it, but they don't find it to be particularly effective in their practice. We really have not heard a whole lot about its widespread use anywhere else.

Okay. And then Ken, you sort of slipped and said mice and then rats, but that obviously raises the question of applying ContraPest to other species, mice or something beyond that. What's the outlook for that going forward?

So we have submitted to the EPA the amendments to add mice to the label. They're currently in the process of reviewing it. I would tell you that the normal process takes about six months, plus or minus. We've had positive experiences with the EPA in the past, so we're hopeful that by mid-next year, we'll be adding mice. We've already demonstrated that it's highly effective in mouse control, so we are optimistic for 2021.

This will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Well, thank you for your attention. If you have any questions, we encourage you to send them to us via the Contact Us section of our website or call us at 928 779-4143. We appreciate your continued interest and support. This concludes our call. Good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.