SenesTech, Inc.

Good day, and welcome to the CinesTech third quarter fiscal year 2021 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. And I would now like to turn the conference over to Robert Bloom. Please go ahead.

All right. Thank you very much, and thank you all for joining us today. On today's call, we will discuss Synestec's third quarter 2021 financial results for the period ended September 30, 2021. With us on the call today are Mr. Ken Siegel, the company's chief executive officer, 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 SNES Tech during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act 1933 as amended, and Section 21E of the Securities Exchange Act 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 risk 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 the company's filings with the Securities and Exchange Commission. All forward-looking statements contained during this conference call speak only 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, and thank you all for joining us today. As you saw in the press release we issued after the close, the third quarter of 2021 showed continued improvement in the adoption of ContraPEST, with revenue more than double that from last year, and up 14% from the most recent second quarter. This is yet another record revenue quarter for Synestec. On a year-to-date basis, we're up 133% from the year-ago period. The record quarterly and nine-month results are being driven by growth in each of our targeted market verticals, including agribusiness, such as poultry farms, municipalities, such as our deployments in Hartford, San Francisco, Washington, D.C., and another one we recently announced in the Boston suburb of Newton. Zoos and sanctuaries, where we now have deployed ContraPest to more than 50 locations. Commercial applications, where we are primarily selling through distributors to a variety of end markets. And finally, our direct-to-consumer offerings, where we sell through our online store at ContraPestStore.com. By the end of the quarter, we were finally able to fully integrate all of the efforts we've been working on for the past two years to fully commercialize ContraPest. These included enhanced sales and marketing tactics to drive awareness and recognition of ContraPest, new advertising and public relations initiatives through our Operation Rat Race campaign, development of a new website and branding, the launch of our e-commerce site, ContraPestStore.com, completion of compelling real-world long-term studies across key market segments, and enhanced strategic partnerships and collaborations with key distributors and pest management professionals. As we previewed on our last call, the highly anticipated launch of our multi-channel sales and marketing blitz with the internal code name Operation Rat Race launched late in the third quarter and is now in full swing. The campaign is bold and focuses on supporting safe rat sex. We hope that you have a chance to see our many fun and unique posts on the leading social media platforms. We've also bought media placements in key geographies and are leveraging an agribusiness-specific marketing agency where we are engaging in programmatic campaigns directed at poultry production and the owners or operators of grain and food storage facilities across the U.S. We'll also be attending annual meetings and conferences in agribusinesses through local and national associations, where we'll be educating business owners and operators about the effectiveness of ContraPest and the substantial bottom line improvement potential we've demonstrated through our real-world studies. Our tactics in California, for instance, include, in addition to our agribusiness outreach, both digital and out-of-home placements aimed at household consumers planned communities, and municipalities. We also have a tailored campaign we're running in Malibu where they've decided to go completely poison-free, which includes both radio and billboard advertising. We're leveraging the overall campaign to build confidence among the pest management community as well through trade shows and traditional advertising through industry media. We're working hard to make sure that the industry understands that we are a highly valuable solutions provider, that can improve customer loyalty and their bottom line. So while Safe RATSX draws you in, the real goal of the campaign is all about building awareness and driving demand among end users. Each vertical has a specific campaign landing page speaking to their needs with tailored calls to action capturing interest and engagement. Very simply put, and Nicole Williams mentioned this during last quarter's call, 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. In doing this, we're temporarily breaking away from our sales territory approach and instead engaging the entire organization to work together towards one common revenue goal. Needless to say, we're excited about the campaign and look forward to its impact on sales growth in the quarters to come. Let me transition for a moment and discuss some progress in each of our market verticals. As you hopefully saw, Newton, Massachusetts, a suburb of Boston, was our latest municipality to deploy ContraPest, joining other cities like Hartford, San Francisco, and Washington, D.C., and successfully incorporating ContraPest into their pest management programs. Excuse me. The deployment in Newton has had a beneficial impact on our sales in the state of Massachusetts as a whole and is driving further end user interest, particularly in the Boston metro area. ContraPest is also being successfully deployed on a neighborhood level in Seattle. Extensive media coverage of rat issues in major metropolitan areas is increasing inbound interest and contrapest from neighborhood and community associations, which we hope will translate into revenue in the coming quarters. In the meantime, our sales force is aggressively mining these relationships to drive adoption going into next year. Our zoos and sanctuary segment continues to gain traction, comprising nearly 20% of our year-to-date sales, with orders from more than 50 different customers. 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 this segment as ideal for addressing the concerns of rat infestations due to both its effectiveness and the lessened risk to non-target and predatory animals. In the agribusiness segment, following successful agricultural deployments of ContraPest with demonstrated sustained success in reducing rat populations and improving economies in poultry farms, the company has established additional distribution through companies focused on farm animal health. As I mentioned before, early in the fourth quarter, we launched a comprehensive targeted sales and marketing campaign to poultry producers and grain and feed storage facilities. In addition to attention grabbing rat race marketing, we're using our compelling data from our poultry studies that show dramatic declines in grain consumption and contamination by rats once contra pest has been introduced. In the direct-to-consumer vertical, I spoke in detail about the impact that Operation Rat Race will have in this area, but here are a few more details. At a high level, expanding our online presence is a key focus for us. We launched ContraPestStore.com earlier this year as a way to directly access consumers. Some of these are individuals, some are small business owners, while some are larger corporations and PMPs. Direct sales are nearly a third of our year-to-date revenue. The channel has added more than 250 new customers during the third quarter and saw a sequential decrease in churn down to 4%. A key focus over the next several quarters is expanding our subscription business where nearly 10% of our active users now are part of a subscription program as we continue to test different offerings to incentivize automatic repeat purchases which ultimately drives recurring revenue. We see these as very nice trends and are optimistic about the continued traction we can gain in this segment. In California, while a geography, it's being uniquely targeted by us due to the backdrop of favorable ecographics, including the recent legislation restricting the use of major second-generation anticoagulant rodenticides. This legislation coupled with growing environmental awareness and the removal of the restricted use product from the contrapest label continue to be key tailwinds for us in this market. Similar to last quarter, sales within California continue to represent nearly a third of year-to-date sales. Operation Rat Race has added targeted advertising and public relations campaigns to stimulate demand in this critical market which has directly resulted in 108 new customers in California since the start of the campaign in late August. As I mentioned in the municipal segment, further reorders continue to occur in key California cities as well. We clearly think California is a significant opportunity for the company and are certainly putting the resources to work to ensure we can benefit from the investment in this key market. California often leads the country in the adoption of new products and initiatives, and we think this will certainly be the case for ContraPest. To reiterate something I said last quarter, I believe we now have a good structural base in place that's beginning to produce results. We have a product that works, a great product that works. We have data that shows customers it works in the settings they care about. We have relationships with strategic PMPs and key distributors in place that share our common values about ways in which to address rat infestations through an integrated approach. We have an e-commerce site in place that is functioning well and driving new customers every month. And finally, we have an integrated marketing, advertising, and public relations strategy to get our messaging out in a unique and compelling way. We remain laser focused on putting together all the building blocks to successfully drive our commercialization strategy. And with a number of key sales acceleration tactics now firmly in place, we have strong reasons to be optimistic. We just need to execute. And with that, let me turn it over to Tom to review the financials.

Thank you, Ken. As a reminder to our investors, the press release is available on our website in the investor relations section. Further, we expect to file our 10Q on Friday, so I will just touch on some of the high points today. Revenue during Q3 was approximately $183,000 compared to approximately $77,000 in the third quarter of 2020. This represents growth of 138% more than doubling the revenue in Q3 of 2020. This revenue included grant revenue of $24,000. Excluding the grant revenue, growth was still 106 percent, maintaining our doubling sales trend for another quarter. We are beginning to see the positive effects of Operation Rat Race and our effort in the agriculture segment, both of which commenced late in the quarter and both of which we expect to drive continued success in the fourth quarter and in 2022. Gross profit for the quarter was approximately $77,000 or 42% of total revenue for the quarter, compared with approximately $36,000 or 47% of total revenue for the third quarter of 2020. This was negatively impacted by sales discounts and manufacturing inventory adjustments. We expect that the cost of manufacturing itself will continue to approach 50%, but that we will continue in the near term to offer discounts selectively to attract and retain customers. Net loss for Q3 2021 was $2.3 million, compared with a net loss of $1.9 million for Q3 2020. Adjusted EBITDA loss, which is a non-GAAP measure of operating performance for Q3 2021, was $2.0 million compared to $1.7 million in Q3 2020. It should be noted that operating expense was negatively affected by a free shipping promotion during the quarter, an expense that shows up in optics rather than cost of sales. Adjusted EBITDA loss, sometimes referred to as burn rate, is likely to continue in the short term at a rate equivalent to $7 to $8 million per annum as we continue to invest in operating expenses that should drive customer and revenue growth. Cash at the end of the quarter. was approximately $11.1 million. With continued fiscal discipline, this cash should be sufficient to fuel our growth strategy for over a year. That said, we do intend to file an S3 for a renewal of our shelf capacity, which expired earlier this year. A shelf, or an S3, is an SEC provision to register a new issue of shares without having to sell the offering at once but instead to offer portions of the issue selectively over a three-year period. That is our intent, to be selective about capital raises, balancing the need for resources with shareholder interests. With that, let me open the call to questions. Tom, could you do so?

We will now begin the question and answer session. To ask a question, press star then one on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. We will pause momentarily to assemble our roster. And the first question comes from Avi Fisher with Longcast Advisors. Please go ahead.

Hey, Ken and Tom. Thanks for the update. I just had a quick question regarding the Lipitech collaboration that was announced in March. If you said something about it, I missed it. I apologize. But can you provide some sense of how that's moving?

We are still working through the formulation issues, Avi. So we have managed to combine the ContraPest actives with their product. We're now assessing stability, ultimately with a view toward doing a feed and breed product. But right now we're still going through the stability testing. So we'll probably have more to talk about that in the next quarter call.

And, I mean, Tom talked about you know, the expected annual burn rate. And I have to assume that the expectation is, you know, a year and a half from now, your plant, you expect to at least be break even. How do you model this non-liquid opportunity? Is it bigger than the liquid opportunity? Is it the same size?

It's interesting. We think that obviously the liquid is extremely compelling due to the needs of rodents to consume 10% of their body weight every day in water. What we're looking at and what we're still assessing is how valuable the solid product will be in some consumer applications and in familiarization with the pest management community that likes to deploy wax blocks and the like. So, you know, we think it could be a, you know, a very big market. But, you know, we think right now, even with the liquid product, we've got an enormous runway.

I agree. And appreciate the work you've been doing. And thanks so much.

Okay.

Again, if you would like to ask a question, press star then one to join the queue. The next question comes from George Fox, who is a private investor. Please go ahead.

Hello, gentlemen. How are you doing? Right there.

Very well, thanks.

Good, good. Very pleased with the results this quarter. I think the growth in customers is the real statistic that should be looked at, and I'm I was going to ask about the pebbles, the dry formulation as well, but I think I understand where you're at with that. How about the market in Australia? I had spoke with one of you earlier about that. Has there been any change in the opportunity there in Australia with the rat problem they're experiencing?

George, we continue to... try to work with the government in Australia. We were working to see whether or not they would give us emergency authorization to go in. And essentially, you know, what their response is, and you can imagine this is the government at the end of the day, they think that with the onset of seasonal change, the problem was going to abate. So they're not prepared to allow us to go in on an emergency basis. So we're working on putting together the various you know, international data submissions that we need to do, not just for Australia, but for other countries around the world.

Oh, I see. Would the United Nations have some sort of program that would be kind of worldwide that you could apply to?

No, unfortunately, it's country by country. And, you know, we run into this situation regularly. periodically, but what we're doing more and more is we're trying to see whether or not we can get local agencies to attempt to bring us in on an emergency basis. We've thus far been come up dry in Australia, but we're looking at that as a vectors in other countries that are, you know, not quite as bad as Australia with, with the rat problem, but you know, are having growing rat issues.

Oh, good. Well, the final question would be, um, How about word of mouth? You indicated that you're having a fairly good repeat customer rate. I wasn't quite clear on what it is, but I'm assuming the 4% churn means that a lot of your customers are repeating orders.

Yes.

And among the agriculture and cities, and oftentimes word of mouth is a very, you know, if it works for one city, they're, you know, happy to share it with others. Are you able to utilize that in, uh, are you having success or are you getting recommendations from, from existing successful customers?

We're starting to, um, you know, the good, I mean, interesting piece of this was the, the interesting factor in the, in the recent Newton placement, which actually came off of, you know, the Hartford, uh, deployment that we did, you know, in the late spring, early summer. And what we're now seeing, since Newton aggressively publicized the fact that they were doing that, we're now starting to see a bunch of inbound inquiries, not necessarily from the governments, but from the constituents. So we're starting to see the community associations, the neighbor associations, the planned communities now beginning to reach out because they're seeing successful deployments in the cities. Similar piece mostly right now in direct-to-consumer. We have sort of a rabid enthusiast base, if you will, that are talking us up a lot on social media, which is driving more of the consumer traffic. We're early in the campaign now around agriculture, so we expect to see more word of mouth coming in the next couple of quarters as we get more deployments under our belt.

This concludes our question and answer session. I'd now like to turn the conference back over to Ken Siegel for any closing remarks.

Thanks. So, again, thank all of you for joining us today. I think as you've seen and I mentioned probably a couple of times in the script, the pieces have finally come together and I think the final piece, which is really giving us, you know, The power behind the overall commercialization strategy is the new marketing advertising campaign and the robust way that we're promoting ContraPest. So look forward to updating you more as the campaign gains traction. Remember, it's only a few weeks old, but hopefully we'll have a lot more exciting things to talk to you about in the full year call early next year. So again, thank you for your attention and look forward to talking to you again next quarter.

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