SenesTech, Inc.

Good afternoon, everyone, and welcome to the SNES Tech Incorporate Inc. Report's second quarter fiscal year 2023 financial results conference call. 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 and one using a touch-tone telephone. To withdraw your questions, you may press star and two. Please note that today's event is being recorded. And at this time, I'd like to turn the floor over to Robert Bloom with Lithum Partners. Sir, please go ahead.

Great. Thanks so much, Jamie. Thank you for joining us today to discuss Finestec's second quarter 2023 financial results for the period ended June 30th, 2023. With us on the call today are Joel Fruent, the company's chief executive officer, and Tom Chesterman, the company's chief financial officer. At the conclusion of today's prepared remarks, we'll 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 SNESTAG 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 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 votes 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 on 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 the result of the receipt of new information, the occurrence of future events, or otherwise. With that said, let me turn the call over to Joel Fruent, Chief Executive Officer, Synestek. Joel, please proceed.

Good afternoon, everyone. Thank you all for joining us today. We are pleased with the progress we made across the enterprise during Q2. During the quarter, we continued to grow our revenue and customer base with record quarterly revenues of 31% sequentially. We also made significant progress reducing our adjusted EBITDA loss, which was the best it has been in two years as we brought efficiencies to many aspects of the organization, and we set in place key initiatives which are now showing results. Growth has since accelerated into the third quarter, with July 2023 monthly sales growing 126% compared to the year-ago period. Driven by the initiatives we have undertaken to drive sales, improve product quality, and expand product options, growth is clearly accelerating. While growth is important, profitable growth is paramount, especially in today's market. We have put in place key initiatives for both our field sales and e-commerce channels to improve the return on our sales and marketing investments. Within our field sales operation, we have redeployed and refocused our direct sales efforts to enhance our customer acquisition capabilities while also putting sales reps closer to the customers to focus on the numerous large opportunities that are available for our unique fertility control product. Further, We have also expanded our field sales organization, each deployed by a geography with leadership in both the eastern and western half of the US. This strong regional focus on new customer acquisition through an expanded commercial team and new depths of vertical industry knowledge to get in front of decision makers is all designed to tighten the sales cycle and ultimately drive revenue. Evidence here is the significant increases we are seeing within the government vertical driven by deployments in California and New England, and our experience that customers in the government sector require a longer sales cycle, but are very sticky once they are on board. Our traction within zoos and animal sanctuaries continues, and ContraPest is now a major IBM component in four out of the top 10 zoos in the U.S., and accounts for 14% of our revenues. In the agribusiness vertical, we initiated shipments to major companies in grain, and poultry. It's clear that rodent population control is becoming an increasingly important focus for pest management professionals in this vertical, especially where the risk of exposure to lethal rodenticides is critical. On the e-commerce site, we have reconfigured our marketing spend and have added additional products and options to our e-commerce site, such as a 12-month prepay subscription for e-commerce customers, along with convenience items. July was our largest e-commerce revenue month of the year. All of these initiatives to increase sales penetration are translating to the income statement. A quick look at the second quarter results will show that we decreased our SG&A by more than $500,000, but saw an increase in revenue. With this improved ROI being demonstrated, coupled with the strong growth out of the chute in the third quarter, it is clear our initiatives are taking hold. In addition to our domestic selling efforts, we also commenced our international expansion having entered into an agreement with PES of South Africa for the commercialization of ContraPest into South Africa. We were introduced to South Africa and PES by the South African National Council of SPCAs who are continuing to advise us and who clearly articulated their support for fertility control and ContraPest in particular. They have committed to recommend ContraPest to private and state entities and to assist with regulatory issues. We also announced entry into a distribution agreement with Pest Terminators of Maldives for the deployment of ContraPest into their country. As Pest Terminators is part of a multinational pest control organization, the potential expansion of the agreement throughout the region is contemplated in the agreement. Pest Terminators has secured import approval and has placed their order for the first deployment of over 150 stations, which we are shipping this week. They have subsequently placed another order due to their demand projections and the interest in our new product options. While I am certainly pleased with the growth we are seeing, especially in the first half of the third quarter, we all know that the objective here is to steepen the curve. One of the ways we plan to do that is to continue expanding our product options for consumers. To that end, we recently launched a new delivery system for ContraPest, the Isolate bait system, which has an integrated tank tray unit designed for ease of use, catering to both professionals and the do-it-yourself market. It is important to note that the design of the Isolate bait system comes directly from customer requests. who wanted to maintain the efficacy of ContraPest but make the deployment and servicing quicker and easier. The design combines the tank and tray into one unit, and the deployment and setup is done through a simple placement and peel-off seal, with users showing up to an 80% reduction in time and effort. We believe the introduction of Isolate should further accelerate the adoption of ContraPest by both professionals and do-it-yourselfers. We are accepting orders for isolate delivery starting next week, and we have over 1,500 isolate pre-orders, and we expect delivery of orders before the end of the month. Taking a step back, when we first introduced ContraPest, we needed to convince the pest control market of two things. One, the value of fertility control as a means of population control, and two, the applicability of a liquid bait into their procedures. At this point, there is growing acceptance of fertility control as part of integrated pest management, and there is still resistance from pest management companies to alter their established practices of utilizing non-liquid products. To address this resistance, we are in the final stages of releasing a softbait formulation, which provides unique attributes of proven fertility control in an industry-familiar softbait format demanded by many, including big box retailers, key e-commerce channels, and leading industry pest management professionals. When I first took over as CEO at Synestek, soft bait was one of the key items I quickly identified as a need for us to steepen the curve. I believe its introduction in the coming months will be transformative to our business. We expect to be announcing some exciting news on this topic soon. But let me state this. We expect to have this on the market by the fourth quarter. Finally, on the last imperative, to make better products. I mentioned the last quarter, this last quarter, but when I took over as CEO during the third quarter of last year, our customer complaints peaked at 35 complaints per month. Not that high, but we were doing an adequate job. But I knew we could improve it. During the second quarter, even amidst higher volumes, our complaints averaged less than five per month. Concurrent with the introduction of Isolate, we have implemented an enhanced formulation of ContraPest that should improve product quality and a wider variety of environmental conditions. I believe we have made great strides in the area of continuous improvement. But as I have stated since I took over as CEO, this is a results business. We know that. We need to steepen the adoption curve of ContraPest. We spent the first part of the year building the base, and now we are seeing rapid growth we all know is going to get better and better. With that overview, let me turn it over to Tom to review the financials. Tom?

Thank you, Joel. 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 10-Q either later today or early tomorrow, so I will just touch on some of the high points right now. Revenue during the second quarter was a high of $305,000 compared with $277,000 in Q2 of 2022, an increase of 10%. Sequentially, revenue was up 31% compared to Q1 2023. Sales growth during the second quarter was led by growth in the government vertical, driven by deployments in California and New England, as well as continued traction within zoos and animal sanctuaries. As Joel mentioned, July 2023 sales were up 126% compared to the year-ago period. Growth is accelerating, as our initiatives put in place in the first half of the year take hold. Gross profit during the second quarter was approximately 142,000, or 46% of total revenue, compared to approximately 136,000, or 49% of total revenue in Q2 of last year. Excluding costs related to the introduction of the enhanced formulation and the isolate bait system mentioned by Joel, I estimate the gross profit would have been in excess of 50%. Net loss during the Q2 2023 was $2 million compared to a net loss of 2.6 million for Q2 of 2022. Adjusted EBITDA loss, which is a non-GAAP measure of operating performance, for Q2 2023 was $1.7 million compared to $2.3 million in Q2 of 2022. Our current goal has been to take $1 million out of the annual cash expenses, and we're well away to achieving that goal. I look back and can recall when the company was burning well over $10 million of cash annually, and we've brought that down to a run rate of under $8 million cash burn annually. all while growing the business, introducing new products, and expanding our reach. Cash at the end of 2023 was $2.2 million. As I'm sure you all are aware, we filed an S-1 with the SEC to raise a little over $7 million, and our goal is to raise enough cash to confidently execute our commercial plans, including the launch of SoftBait, for a year or more. With that, let me turn it back over to Joel for any closing remarks, and then we will take your questions. Joel?

Thanks, Tom. Before we turn it over to any potential questions, I think it's important to note what a significant opportunity we have to create something truly special at Synestec. We are addressing one of the world's oldest and most challenging problems, rodent control, through a completely different way than has ever been done before. By addressing the root cause of the problem, reproduction, we have all heard the statistics of how two breeding rats given sufficient food, water, and harborage can produce up to 15,000 descendants in their lifetime. This is a truly incredible statistic that cannot be ignored. The existing solutions effectiveness poisons are limited by the rat's reproduction rate, resistance, and aversion, as well as the enhanced social and political limitations on the use of poison. As communities increasingly look to deploy sustainable, effective solutions, ContraPest fits right in with that objective. Products that can be paradigm changing don't come along very often, but when they do, they have an opportunity to change the way things have been done for generations. I believe ContraPest is that type of product, and I believe we have that type of opportunity. This is why I joined the company. I thank you all for your continued support, and with that, operator, let me now turn it over for any questions.

Ladies and gentlemen, at this time, we'll begin that question and answer session. If you'd like to ask a question, you may press star and 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then 1 to join the question queue. Our first question today comes from Amit Dayal from HC Wainwright. Please go ahead with your question.

Thank you. Good afternoon, everyone. With respect to the software launch in the fourth quarter, can you talk a little bit about distribution strategy for this? What channels are you going to use to reach end customers?

Yeah, absolutely. So we're really excited about the launch. We think that soft bait has been a product that's been out there and other solid baits that are through the retail channels for consumer use, as well as through the pest management professional channels. So we're really going to focus on a big box retail, a launch plan, as well as a pest management professional plan. and, of course, the international distributors that we have set up, in addition to still relying on our field salespeople to be in touch with the end users to pull that through.

Okay, thank you. And then in relation to the S1 filing, you know, new financing needs, partly it may go towards launch for soft data. I mean, timing-wise, can you provide any color on how you are going to manage the financing needs over the next two quarters?

Yeah. Unfortunately, with the pending S-1, we cannot comment on timing. That's not allowed, as we understand the rules from the SEC. But we do intend to access the capital markets. I mean, that's our obvious route of choice at this point. I would note there are also Warrants, outstanding. We've always sought to see if we can get financing from the warrants. In fact, some of them will be expiring soon, so hopefully we can make them or induce them to exercise as appropriate.

And this last one, you know, with respect to sort of sales mix, looks like the government side, you know, you guys are doing pretty well. You have a user base with Zoos and, you know, those types of customers as well. You know, how are you bringing other customers like, you know, maybe farms, et cetera? Is that in the pipeline? Can you talk a little bit about, you know, pipeline for sort of non-government type customers?

Yeah, the most exciting part of our business, I believe, is on the agriculture side. We're seeing increased business in the poultry and grain sectors, as I had mentioned earlier. We have some great expertise in that area in our field sales team who have come over from that vertical. And we are expanding that on a daily basis. We're starting to see good reorders. One example is from a large grain export company. and we're starting to see more and more reorders from them, as well as one of our leading customers this year is a poultry house that has had three different reorders now. So very excited about that.

All right, guys, that's all I have. Thank you so much.

Once again, if you would like to ask a question, please press star and 1. Our next question comes from Tucker Anderson from Above All Advisors. Please go ahead with your question.

Hello, Joel and Tom, and congratulations on the progress you've made. I guess my first question is sort of a follow-up on the last question, and that is how can you achieve more rapid mind share among potential customers of what I agree with you, Joel, as a paradigm shift? And paradigm shifts, as you know, proceed slowly until suddenly they gain a critical mass.

Yeah, absolutely. And I think that's one of the things that we're seeing is that we're out there, we're doing the field work that's necessary of working with the customers, doing the field tests. And once you start seeing the field tests have success, then you start seeing the business start to flow. So I think that's one of the reasons that we've, had success in the zoos and sanctuaries. We got out there, we did the legwork, we showed them that it worked, and then you start seeing the repeat orders come in. So with the expertise that we've added in our field sales team, as I mentioned on the agriculture side, but also on the pest management professional side, what we're doing is really focusing on the pest management professional side, both in the smaller companies as well as the larger companies. And we've got some real exciting discussions that are taking place with some of the larger companies, especially as it relates to our soft bait introduction.

And the fact that you now have some customers that appear very satisfied in certain markets, like the zoo market and the poultry market and the grain market, Does the fact that you have reference accounts really help your salesmen as they go and try to get new accounts?

It absolutely does. One of the things that we face on a daily basis is no one wants to admit they have a rat problem. So once we get past that and we're allowed to use them as a reference, what we've seen is that that accelerates the activity in that vertical. And we've got some really good field trials going on right now, both with our liquid product and with our soft bait product. And as I mentioned, we expect to have some really good news to report in September.

We're looking forward to it. The last question would be sort of as you penetrate the municipal market, and the soft bait market comes on, it seems to me sort of obvious that in large municipalities, especially there should be an obvious link between what the municipality is doing and the fact that homeowners and office buildings and things like that should be made aware of these products. Has there any sort of been educational program developed that would link the rollout in the municipalities with the education of the other potential buyers in the markets?

You know, the one that comes to mind that we use as a reference point is Los Angeles County. We started out there doing some field trials, started doing some projects. Next thing you know, the county is actually specifying the product into their request for proposal. And they were getting a lot of questions about, well, why don't, Can't we just use poisons instead? And they said, no, what we want is we want to have fertility control so that we can reduce the population, which is the first step to a successful program to face up to what is happening out there. And then once that started happening, we're starting being used on more projects. They're starting to do some outreach programs to different communities. HOAs, property management companies about here's something that you should look at doing because it's effective and it really is a sustainable product and reduces the reliance on lethal poison. So we're really getting some good traction there. You know, the other one is Santa Clara County. So we moved north in California and Santa Clara County did their field work, said this is the product we want. And now you're seeing it going into cities who are using it. The cities are putting articles into newspapers about what they're doing and offering outreach to the consumers and the homeowners. So we're starting to see that traction that you mentioned, and I appreciate your observation on that, take hold. And as we start getting into other areas such as Boston and some of the larger cities we're starting to see that there as well. So that's a real exciting component of it.

Yeah, and as I said, it seems to me it really is timed perfectly for your introduction of a soft bait in terms of ease of handling and that sort of stuff. My last question is an optimistic question. That is, if the progress you've seen and especially the acceleration of of the progress you've seen in July and early August, and your sales sort of expand exponentially. Is your logistical system in place to handle success?

Yeah, I think that's a great question, and it's one that we certainly hope is going to come to pass, but yes, it can handle that. One of the things that occasionally people ask is, why do you have such a high burn rate? Well, one of the reasons we have that is we have the infrastructure to grow very rapidly, both in terms of manufacturing, in terms of logistics. So, yeah, we are planning for that. We are expecting that to occur. Exponential is exactly what we hope for.

Well, as I said, congratulations on perhaps reaching the tipping point.

Thank you. We appreciate that.

And ladies and gentlemen, at this time, we'll be ending today's question and answer session. I'd like to turn the floor back over to management for any closing remarks.

Thank you all for attending today. We enjoy these quarterly get-togethers and keep you posted on our progress, and we're looking for really big things in the third quarter here. Thank you.

And with that, ladies and gentlemen, we'll be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.