SenesTech, Inc.

Good day and welcome to the CinesTech Inc. second quarter fiscal year 2021 financial results. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one. Please note that this event is being recorded. I would now like to turn the conference over to Robert Bloom with his partners. Please go ahead.

All right, thank you very much, Cole, and thank you all for joining us today. As Cole mentioned on today's call, we will discuss Finestec's second quarter 2021 financial results for the period ended June 30th, 2021. With us on the call today are Mr. Ken Williams, the company's chief executive officer, Tom Chesterman, the company's chief financial officer, and Nicole Williams, the company's chief strategy officer. At the conclusion of today's prepared remarks, we will open the call for a question and answer session. As a note, the company has provided a slide presentation to accompany the prepared remarks today. If you are listening via the webcast, the presentation will be on your screen. For those on the live dial-in portion of the call, you can access a copy of the presentation from the investor relations portion of the company website at synesstech.com. Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of SNF Tech during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act 1933 is amended, and Section 21E of the Securities Exchange Act of 1934 is 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 of the date 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 by the results 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. Please proceed.

Thanks, Robert. Good afternoon, everyone, and thank you all for joining us today. As Robert mentioned, for those of you that have followed the company over the past few years, we thought we'd try something different this quarter and include a slide presentation for you to follow along with as we deliver our remarks. We hope you all find it useful, especially as we walk through some of our new sales and marketing initiatives that we have in place. As you likely saw in the press release we issued after the close, the second quarter of 2021 showed continued improvement in the adoption of ContraPest, with revenue up 125 percent from the year-ago quarter and up 82 percent from the first quarter. This was, in fact, a record quarter for Synestec. However, while these improvements are good, they are still from a relatively small base and we're highly focused on significantly expanding adoption in the quarters to come. Everyone on the management team knows that ContraPest offers customers and the PMPs that service them a powerful, effective, and sustainable tool to control rat infestations. I personally believe that ContraPest will be a game changer in the industry, and we are highly focused on making it the success we know it can be. As we've discussed over the past several quarters, we've been laser focused on putting together all of the building blocks to successfully drive our commercialization strategy. Last quarter helped us further advance our goals as we were finally able to get our team out on the road to meet directly with our channel partners and customers. We launched our new branding and marketing strategies, and we significantly enhanced our sales and marketing capabilities. So let's briefly discuss some of the progress we made during the quarter against our core areas of focus. We will then expand on some sales and marketing strategies that we've deployed that are gaining traction and tell you about a major new initiative set to launch next week that we are highly optimistic about. I've asked our new chief strategy officer, Nicole Williams, to join us today to provide some additional details on those strategies as well. Nicole joined us in May and has immediately made an impact across all aspects of our organization. helping to develop and execute strategies to accomplish the growth that we as a management team, and I'm sure you as shareholders, are looking for. But before we get to the forward-looking strategies, let's take a moment to look back at the second quarter and year to date. So as I mentioned, quarterly sales were up 125% year over year to $160,000, a new quarterly record for the company. Year to date, sales are over $248,000. And to put that in perspective, product sales for all of 2020 were only $258,000. The key sales acceleration tactics we have discussed on the last few calls are all contributing to this growth. They include enhanced marketing techniques, new advertising and public relations initiatives, development of a new website and branding, the launch of our e-commerce site, ContraPestStore.com, the completion of compelling real-world long-term studies across key market segments, and finally, enhanced strategic partnerships and collaborations with key distributors and pest management professionals. These strategies against the backdrop of favorable legislation changes and growing environmental awareness highlighted by California's new legislation restricting the use of major second-generation anticoagulant rodenticides are playing into our favor as well. Year-to-date, sales to California were nearly a third of our overall sales. As we've discussed for some time, we are focusing our efforts towards high-value target segments. These include agribusiness and municipalities, as well as zoos and sanctuaries, and the consumer residential market. We're delivering solutions to these segments through our distributor relationships, PMP relationships, direct sales, and our expanding e-commerce platform. A key factor in adoption by these high-value targets continues to be the long-term studies we finished earlier this year. As a reminder, we spent the better part of last year completing agricultural and urban setting studies which resulted in overwhelmingly positive efficacy and economic results. At a West Coast egg farm, the final results confirmed that contra pests cut the rat population by over half within six months and produced a sustained 90% decline in rat activity over the 12-month study. At an East Coast pullet farm, the staff reported an 88% improvement in pullet survival after reducing their rat population with ContraPest. The annual benefit projected by the customer was over $600,000 in increased revenue and decreased costs. In our urban deployments, data collected showed a 94% reduction in rat activity and a 98% decline in juvenile rats at one site, while a second site had a 99% reduction in rat activity and 100% decline in juvenile rats during the same period. To highlight the progress we made in the municipal market, we fulfilled an order with a large East Coast city, which continues to place additional orders as its deployment expands to other city-owned properties. The resulting success has provided direct references to additional municipalities in New England, the West Coast, and the Midwest. Excuse me. Additionally, further reorders continue to occur from key California municipalities as well. And in agribusiness, while still early in the process, we have established additional distribution through companies focused on animal health, which we believe will be an additional entry into the market. Our zoos and sanctuary segment continues to gain traction, comprising nearly 20% of our year-to-date sales, with orders from more than 40 different customers. As you're likely aware, secondary exposure from poisons has become a growing concern, especially in environments where non-target animals or wildlife reside. ContraPest is increasingly being recognized among influencers within the segment as ideal for addressing the concerns of rat infestations due to lessened risk to non-target and predatory animals. Transitioning. A key objective for us going forward is to expand our online presence. As we talked about last quarter, we launched contrapeststore.com as a way to directly access consumers. Some of these are individuals and small business owners, while some are larger corporations and PMPs. It's been interesting to see how sales growth has increased in this channel. Direct sales were nearly a third of our year-to-date revenue, and we experienced strong growth sequentially. The channel has added more than 250 new customers during the second quarter and saw a sequential decrease in churn. Average order sizes are also increasing. Overall, active customers on our e-commerce portal now number more than 400. We see this as a very nice trend and are optimistic about continued traction that we can gain in this segment. As we mentioned in the press release, to accelerate initial adoption and first-time purchase, we enacted package and promotional discounts, which did have an impact on near-term gross margins. We believe this will ultimately drive longer-term purchase renewals as the benefits of ContraPest are recognized by consumers. A key focus over the next several quarters is expanding our subscription business. We are now testing different offerings to incentivize automatic repeat purchasers, which we believe will drive both customer satisfaction and recurring revenue. I believe we now have a good structural base in place that is beginning to produce results. First off, and most importantly, we have a product that works. Second, we have data that shows customers it works in the settings they care about. Third, we have relationships with strategic PMPs and key distributors in place that share the common values we do about ways in which to address rat infestations through an integrated approach. Fourth, we have an engaged sales team that is now out in the field driving sales. Fifth, we have an e-commerce site in place that is functioning well and driving new customers every month. Sixth, we now have an integrated marketing, advertising, and public relations strategy to get our messaging out in a unique and compelling way. So what's next? And how do we take a sizable leap forward? In the next week, we'll tie everything together with an aggressive new multi-channel sales and marketing campaign that we expect will dramatically expand sales over the next several quarters. The new advertising campaign and sales blitz, codenamed Operation Rat Race, is designed to dramatically expand lead generation and sales opportunities across each of our key market segments. So to expand on this a bit further, I've asked Nicole Williams to provide an overview of the campaign and what you should expect to see from us in the near future. Nicole.

Thank you, Ken. As mentioned, this multi-channel sales and marketing blitz with the internal code name Operation Rat Race references the collective race to top of mind awareness, brand recognition, and revenue throughout the remainder of 2021. Operation Rat Race focuses on our key market segments, agribusiness, household, municipality, commercial professional, zoos and sanctuaries, and additionally, treats California as its own market segment in light of opportunity created through the recent 1788 legislation. The common theme in a campaign as bold and unique as ContraPest, following months of building confidence and relationships within the pest management community and generating compelling real-world data, We are now tasked with building awareness and driving demand among end users for an effective, environmentally responsible, and for some customers, non-lethal solution to managing rat populations. We need customers asking their pest management professionals for ContraPest by name, and we intend to do that by letting target markets know we support safe rat sex. That's right. Someone had to do it, so they won't. Introducing ContraPest for what it is, a rat contraceptive. Going back to the shocking fact that two base rats, a male and a female, can result in more than 15,000 rats in just one year. How will we ever get control of that, managing the death rate alone? We won't. In order to get rat populations under control, we must make them less prolific by controlling the birth rate as well. And ContraPest is the only EPA approved rat contraceptive on the market. A truly integrated pest management program pulls not one, but both levers of population control. Ask for us by name or by direct at contrapeststore.com. Having partnered with new marketing and PR agencies, you may have already heard about the effectiveness of ContraPest across the country via syndicated radio interviews, with many more to come. Our digital strategy is expanding with an increased cadence of prescriptive content creation building our SEO, making us the page to visit to answer your rat control questions, and establishing us as the expert in population control through fertility management. All campaign activity is designed to increase the number of qualified sales leads in our funnel across our strategic markets. Each vertical has a specific campaign landing page speaking to their needs with tailored calls to action capturing interest and engagement. Our social media presence is evolving into market-specific messaging, eye-catching facts and blurbs, aimed at luring customers in for something unique and effective. Leveraging an agribusiness-specific marketing agency, we will engage in programmatic and email campaigns directed at poultry farmers and owner-operators of grain storage facilities across the United States. Tactics in California include both digital and out-of-home aimed at household consumers, plant communities, and municipalities, and a tailored campaign will run in Malibu where they have decided to go completely poison-free. We will continue to build confidence among the pest management community through trade shows to include women in pest management and traditional advertising through industry media. Additionally, we'll be attending annual meetings and conferences in agribusiness through local and national associations, educating business owners and operators about the effectiveness of ContraPest and the overall operational budget savings potential we demonstrated last year on a pullet farm as part of an integrated pest management program. The backbone of this multi-channel marketing campaign is analytics. We're actively integrating our e-commerce, fulfillment, marketing automation, and lead tracking platforms in order to effectively capture campaign results in the form of sales and revenue. Key performance indicators such as tanks, cases, and subscriptions sold, as well as regulatory milestones moving us closer to product expansion, will be tracked and celebrated company-wide for the remainder of the year. In doing this, We're breaking away from our sales territory approach and instead engaging the entire organization to work together towards one common revenue goal for the remainder of 2021. We believe this. Operation Rat Race puts in place momentum and unwavering focus on meeting and hopefully exceeding revenue projections. While some tactics are already live, look for the bulk of the campaign to kick off August 23rd. And with that, Ken, we're off to the races.

Thanks, Nicole, for that overview. As Nicole pointed out, Operation Rat Race puts together all the elements we've been creating over the past two years to drive a compelling and effective commercialization program. We plan to be agile in our approach, actively monitoring our progress, tweaking it along the way, emphasizing what works and modifying what doesn't to build a strong foundation for the balance of this year and beyond. So as I hope you saw, We have strong reasons to be very optimistic about the campaign and the unique way in which it will enable us to expand lead generation and sales opportunities across each of our key market segments. Before I turn it over to Tom to review the numbers, let me just say, if it's not clear already, we are laser focused on accelerating sales and adoption of ContraPest. We believe we have a better understanding today of the strategies to help us get there. And for that matter, I think we have a good idea of what won't work as well, which can be equally important. We're looking to be aggressive in our approach and believe that now is the time to strike. But one thing I want to make abundantly clear, and that's that we will continue to maintain financial and fiscal discipline throughout the organization. It's been one of the key topics I've talked about since I joined the organization, and it won't stop now. The strategies we are putting in place will all be measured against one thing and one thing only, accelerating sales and adoption of ContraPes. And with that, let me turn it over to Tom to review the financials.

Thank you, Ken. A reminder to our investors, the press release is available on our website in the investor relations section. Further, we will be filing our 10Q tomorrow. So I will just try and touch on some of the high points today. Revenue during the second quarter was approximately $160,000 compared to approximately $71,000 in Q2 of 2020, an increase of 125%. As expected, we continue to see strong growth in California, and we expect that an enhanced and focused campaign, as Nicole described, will drive that growth even faster. Doubling revenue year over year is good, of course, but we know we can do better. Direct sales also represented a key driver of growth for the quarter, and our customer acquisition rate was high. Growth in this segment, especially, comes at a cost, though. During the quarter, we had a number of promotions and bundling, which directly affects gross margin. We also provided free shipping to many customers as an incentive to introduce Contrabest. While these customer acquisition costs were significant, we do believe that the efforts will be rewarded by an increased recurring revenue stream by new and happy customers. In other segments, agriculture and municipalities, we have made progress in starting more and more of these customers into the sales cycle, but that is not yet reflected in the current quarter sales. The decision cycle in these segments is much longer than the direct sale and more data-driven based on efficacy. Net loss for the second quarter was $1.7 million. compared with a net loss of $1.6 million for second quarter of last year. And the adjusted EBITDA loss, which is a non-GAAP measure of operating performance for the second quarter of 2021 was $2.1 million versus $1.4 million in the second quarter of 2020. This is a good place to comment on some cost structure items. As will be detailed further in the 10-Q, While there is a significant increase in the research and development operating expenses, they are by nature very different expenses than what we have called R&D previously. This spending is much more targeted to have a near-term effect on revenue growth. In years past, R&D expenses may have included spending for developing products for additional non-rodent species or other pure research. Current spending is focused on improvements to our existing product, how to make it better, how to deploy it better, and how to extend the label with the EPA. SG&A also saw an increase in quarter year over year. This is primarily driven by last year's impact of the pandemic. During the second quarter this year, we have been able to resume travel and direct selling, for example, as pandemic restrictions have eased. The quarter over quarter growth was somewhat driven by the free shipping mentioned previously as well. One note of caution though, the Delta variant of COVID seems to be bringing back some of the restrictions, and we will have to continue to take steps we need to protect our people and respect our customers' wishes. Also of note in the quarter was that the PPP loan was forgiven by the SBA. This resulted in other income of $650,000, which we recognized through the forgiveness of the note and related accrued interest. Cash at the end of 2021, cash at the end of the second quarter of 2021 was approximately $13.1 million. At our current burn rate, we continue to have the resources to execute our current strategies. With that, let me open the call to questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble the roster.

You know, Cole, while we're waiting for potential questioners here, let me just jump in, guys, if I could, with something I came across in the news the other day. I noticed that there was, again, something coming out of British Columbia, Canada, where they've imposed a temporary ban on the widespread sale and use of samascars. Sounds very California-esque. Any color you can provide there? Sure, Robert.

Thanks for the question. So, yes, the Environmental Ministry in British Columbia has announced an 18-month ban on on the use of escars similar to the escars that are restricted in California for most uses. There are exceptions for essential services. There are some exceptions for agriculture, but the key piece here is they've really very significantly tightened down the ability to use poison for pest control. They're going to take 18 months to assess what alternatives there are, so obviously it's an interesting time for us to begin to talk to them about contrapest. But I think it's indicative of a trend that's going to begin to accelerate in North America as states, as provinces begin to take a strong look at the effect that poisons are having on other species, and they're going to be looking to drive pest control professionals and the community more broadly to look for better, effective, and less toxic solutions. Perfect.

Thank you for that. Cole, I'll turn it back over to you if there are any questions there.

We do. And our question will come from George Sparks, private investor. Please go ahead.

Thanks, guys. I like the report. Could you give me an idea of what you think the sales level needs to be to achieve break-even and become profitable?

Tom, let me turn that one over to you.

Well, let me first preface it by saying we don't provide any guidance here, but let me walk you through some relevant arithmetic. We have about between six and $8 million worth of operating expenses per year. It's been coming down a little bit, but that's a good range. Our gross margins are targeted at about 50%. We've been moving closer and closer to those, except for sales pushes, I think we're relatively confident that we can achieve that. So using that, you'd have to see some kind of a revenue model of between 12 and $16 million per annum to get you over that OpEx. I hope that gives you a little bit of guidance there.

It does. Thank you very much. I appreciate it.

And this will conclude our question and answer session. I'd like to turn the conference back over to Ken Siegel for any closing remarks.

Again, thank all of you for joining us today. Again, we're really excited about the fact that all the pieces are coming together. Look out for things that are coming on August 23rd. Also look to see we're getting increasing coverage in the media. But 23rd is the commencement of Operation Rat Race, and hopefully you'll follow along with it as we begin to really drive things here. So again, thank you for your time and attention, and we'll be speaking to you again next quarter.

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