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spk04: 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 can press star then one on your telephone keypad. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I'll now like to turn the conference over to Robert Bloom with Listen Partners. Please go ahead.
spk02: All right. Thank you very much, Anthony, and good afternoon, everyone. Thank you for joining us today. As Anthony mentioned, to discuss SNES text, 2023 financial results for the period ended December 31, 2023. With us on the call today are Joel Fruent, the company's chief executive officer, and Tom Chesterman, Synestec'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 Synestec 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 and the company's filings with the Securities Exchange Commission. All forward-looking statements contained during this conference call speak only 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, Synestec. Joel, please proceed.
spk00: Good afternoon, everyone. Thank you all for joining us today for our year-end conference call. During 2023, we executed several key initiatives that will be the foundation to drive growth for Synestec into the future. Most notable was the development of Evolve, our all-new softbait fertility control product that was launched at the end of 2023. As a reminder, Evolve has similar efficacy to ContraPest, However, Evolve has three distinct benefits to end users. A one-year shelf life that allows for extensive distribution opportunities, comes in a solid form that is more familiar to technicians and consumers and easier to deploy, and is offered at a competitive price to traditional rodenticides. This has dramatically increased our reach in terms of markets and geographies. It is evident from the initial response that Evolve is what retailers and distributors have been looking for from Synestec. One major proof point is our recent approval as a vendor for a leading network of hardware stores, a network comprising over 4,500 locations. Just the first few weeks after Evolve's introductions, they have become the first of many major retailers that will carry our products to target the do-it-yourselfer and broader consumer market. We expect more to come on board in the months to come. To penetrate the retail market quickly, we are in final negotiations with the manufacturer's rep firm that specializes in retail relationships to represent us with these major national and regional retailers in hardware and home supply, industrial supply, and agricultural supply. Another major advancement has been an agreement with a global leader in irrigation solutions for sustainable open field agriculture. Open field agriculture presents unique challenges to rodent pest control. Poisons cannot be broadcast, trapping is expensive, and of limited efficacy. Evolve soft bait with its minimum risk, its reasonable cost, and its proven efficacy provides a new tool for this widespread market. Our partner has selected one of their preferred customers for the initial deployment, a dairy and almond producer in California. Their stated goal is to ultimately expand their offering of Evolve to their customers across the globe as they learn more about Evolve's potential. Agriculture is a huge underserved market. We have another potential customer in sugarcane production. They have over $10 million in annual losses to rat activity destroying sections of their fields. and choose not to use poisons in their field. They will start working with Evolve, broadcasting it throughout their fields, reducing the population significantly, and thus cutting down those economic losses. Also in the agricultural space, we entered into an agreement with Poppy Enterprises, a distributor and pest management firm focused on the grain management market, serving the upper Midwest. Grain storage operations have unique challenges when it comes to rodent pest control. Again, poisons are highly regulated and are tricky to use without contamination, and traps alone are expensive and time-consuming to maintain. The non-poison Evolve soft bait provides a new tool for this widespread market, and in combination with some traps, we'll establish an effective non-poison IPM program. Another key proof point on how Evolve expands our market opportunity is the rapid number of new international distributors we have brought on board over the past few months for geographies outside the U.S., including Hong Kong, Macau, UAE, Singapore, Australia, New Zealand, and the Netherlands. Importantly, these agreements typically include initial orders and annual minimums for geographic exclusivity. In fact, our first pallet shipments have just arrived in Hong Kong and Singapore. A big question I know a lot of investors have been asking is, what will all of this mean for sales and reducing our burn rate? What it can report is that in 2024, as of mid-February, total revenues for Synestek has grown more than 80% compared to the same period in 2023. This is being driven by orders for EVAL, which represented more than 50% of year-to-date 2024 total revenue and includes international revenue for the first time in the company's history. It is increasingly clear that Evolve is a game-changing product person aspect that will be a key driver of our sales growth in 2024. Transitioning the conversation a bit, we have laid out a few key imperatives to drive growth. One was to offer the customers more choices, which Evolve clearly does. Another was to sell better. In some cases, this means improve the infrastructure we have. In other instances, it means bringing in experts in areas where we need additional skills. The manufacturer's rep agency I mentioned is an example. In another example, we are exploring ways to increase our e-commerce capabilities and reach. To that end, we are in discussions to expand our e-commerce offerings with an industry-leading online distributor of pest control products in an agreement expected soon. We want to be proactive in addressing this channel and believe that partnering with a dedicated online retailer will be an efficient way to boost revenue going forward. Due to the early success of Evolve for rat fertility control, it is becoming clear that there is a need to develop a product for fertility control of mice. We see this as a substantial opportunity that is equal in market size to the rat market. Our product development team has been hard at work and is currently enhancing the form factor and dosing of the unique soft bait contraceptive for mice, and have indicated that a product should be ready to market by mid-2024. We brought Evolve for rats to market in less than a year, and now to follow that up with a unique mouse product required a major shift in strategy, a sense of urgency, and improved utilization of resources. We have been up to the challenge. Again, I look forward to sharing more with you on our upcoming calls. Looking back at 2023, we have made some great progress in several areas, which I believe set the stage for future growth, namely our product development process and the launch of Evolve. We also made significant improvements to many of the processes and procedures to drive efficiency across the organization. To give you more detail on that and on the financials, let me turn the call over to Tom. Tom?
spk01: Thank you, Joel. A reminder to our investors, the press release is available on our website in the investor relations section, as will be a recording of this presentation. Further, we have just filed our 10K, so I'm just going to touch on some of the high points right now. Revenue during the year was $1.2 million, an increase of 17% compared to the $1 million in 2022. For the quarter, revenue was 295,000 compared to 297,000 in the year-ago fourth quarter. During the quarter, we saw a pullback in our e-commerce sales. To some extent, this was caused by customer distraction with the Evolve soft launch limited to key customers. As Joel mentioned, this needs to be an area of focus, and we can use the expertise of an industry-leading online distributor of pest control products tuned to outsource our e-commerce capabilities. Gross profit during 2023 was approximately $539,000 or 45% of total revenue compared to approximately $464,000 or 45% of total revenue last year. For the fourth quarter, gross profit was $129,000 or 44% of total revenue compared to $116,000 or 39% of total revenue in the year-ago fourth quarter. The gross profit margin excluded the impact from new product introductions and was 49%. That's an increase of 10 points over the year. One important note I want to put out there is that due to the success of Evolve, we have had to expand our manufacturing capabilities. As a point of reference, we were initially manufacturing about 200 pounds per day of Evolve. Today, we are at about 1,000 pounds per day, and plan to double again in the coming months to meet demand. And that's with a single shift. To this point, Evolve is offered in six and 12 pound pails. However, we are launching a new three pound pouch for the consumer market, which we plan to begin shipping in March. To account for the initial source of raw materials and finished goods, we have expanded our warehouse space in Phoenix. This may result in a dip in margins in the near term, but we would expect a ramp as capacity becomes more optimized. Ultimately, whereas ContraFest brings in gross margin of about 50%, Evolve has the potential to earn 60% or more. Operating expenses for the year were 8.2 million, a decrease of nearly $2 million compared to the 10 million in 2022. We made numerous changes in our operating structure, bringing OpEx for the year down from $10 million in 2022, and this resulted in a $1.6 million improvement for the year in our adjusted EBITDA. The company remains committed to driving operational efficiencies with the goal of removing another million dollars out of annual operating expenses. Net loss during 2023 was 7.7 million compared to a net loss of 9.7 million in 2022, an improvement of $2 million. Adjusted EBITDA loss, which is a non-GAAP measure of operating performance for 2023 was 6.9 million compared to 8.5 million in 2022, an improvement in $1.5 million, as I mentioned. The quarterly adjusted EBITDA loss was the smallest in company history as we strive to achieve our goal of achieving positive operating cash flow as soon as possible in the coming quarters. Cash at the end of December 2023 was $5.4 million. We improved the balance sheet through a $5 million public offering of common stock and warrants in November of 2023, of which we saw $1 million in warrants exercise so far. We're optimistic that as we continue to execute our business plan, that the remaining warrants will be a source of cash over the coming quarters. With that, operator, Let me now turn it over for any questions. Anthony?
spk04: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two.
spk05: At this time, we'll pause momentarily to assemble our roster. Our first question will come from Amit Dayal with HC Wainwright.
spk04: You may now go ahead.
spk03: Thank you, guys. Congratulations on all the progress you've made this year. With respect to, you know, sort of growth expectations of 2024, I know you've commented 80% year-over-year growth so far in 2024 compared to 2023. Could this potentially accelerate, you know, with the consumer offering? Just any color on how we should think about, you know, modeling for 2024 with all of these distribution agreements now in place and, you know, this new, I guess, consumer market for Evolve also coming into play for you.
spk00: Yeah, great question, and I can expand on that. This is Joel. You know, one of the key things with our product is that we have to get the state registration, state approvals. So right now we have 30 states that we can sell in in the United States. We expect to have all 50 sometime in the second quarter, hopefully by the end of the second quarter for sure. So we started out and we're not able to sell everywhere. So that's one factor. Certainly the consumer market and the retail space is a huge opportunity. That market is estimated at $250 to $300 million for rodenticide products. So just being able to step into that marketplace is very significant in itself. So you can see that with those two things lining up and with our international expansion, you know, getting six exclusive distributors in the span of really 60 days here leads us to believe there are a lot of others that will follow in behind over the next six months. So you combine all those three things together and, yeah, there's a major upside with the fact that we now have a product that can be going through distribution on a significant level. So we have distributors that we're working with domestically and certainly those internationally. So we have the product, we know its efficacy, and we have a lot of expertise that's out there now with the product. So we're really excited about the upside potential.
spk03: Thank you for that, Joe. On the margins front, Tom commented about expecting a little bit of a dip in the near term as you sort of expand your presence in the market. But by the end of the fourth quarter, do you expect to be higher than 2023 or similar levels?
spk00: Well, we certainly expect it to be higher. As Tom had mentioned, the margins for Evolve are probably 1,000 basis points higher than what they are for ContraPest. And we've got to ramp it and get it up there and some of the startup costs we've had. But yeah, by the fourth quarter, we expect to see margins that are closer to the 60% than to the 50%. Understood.
spk03: Just one last one for me, guys. Your comments about the e-commerce side of the distribution, did I hear this correctly that you are outsourcing it to your distributor? If you could just clarify how you are setting up the e-commerce effort going forward?
spk00: Yeah, so basically what we're doing is we're outsourcing some of the assistance that we need to really make it expand using some of their resources that they have that we just don't have in-house right now. So they approached us with a proposal on how we could do the e-commerce better. And, you know, we think that we can double our e-commerce business, but we've got to have the right resources behind it. And we think that they can provide the right resources so that we can grow the business on the e-commerce side as well.
spk03: But this doesn't mean sort of any exclusivity with this entity, right? I mean, this is just a service provider for you guys more than any other sort of exclusivity. Okay, understood. Absolutely. Thank you. That's all I have, guys. Appreciate it. Thank you so much. Thank you.
spk05: Again, if you have a question, please press star, then 1.
spk02: Anthony, this is Robert Bloom here. I've got a few questions while we wait to see if there are additional people that are interested in queuing up here that I'd like to make sure get addressed. First question here, been a flow of distribution agreements coming in. several of which have had annual minimums. But can we get some clarity on the size of these orders? Are the required minimums in sort of the tens of thousands of dollars, hundreds of thousands? Any sort of average contract size or minimums that you could provide would be greatly appreciated.
spk00: Yes. So each of those agreements that we have, Larry, represent different territories, different potentials. But typically for us to get involved in an exclusive arrangement is we want to have a local source of product available sooner rather than later. And so our initial orders require a one pallet minimum order, which is about $10,000 roughly. And then we have annual minimums that we set up as well, and those start at $100,000. So really what we're doing is we're wanting to put distributors in place that feel really strong about the product and about the market and are willing to bring the product in. So we're looking to do that in a number of different situations and really help them grow over time.
spk02: All right, perfect. Next question here. It seems that several of these new contracts are contingent on regulatory approval. Has Synestec experienced any hurdles getting Evolve approved in any countries? If so, what is the plan to overcome those hurdles?
spk00: Not really, no. I think the initial distribution that we've signed up, the distributors themselves are very familiar with the regulatory process in their countries and are confident that they can move that forward. So The key is being able to partner with the distributors who know how to navigate the regulation. They take the lead. We work with them on getting the approvals. There are a few countries out there that we've just put on the back burner because they have some really onerous regulatory processes. Initially, we targeted the markets that we feel very comfortable getting the product approved and subsequently being used.
spk02: All right, great. Next question we have here, does Synestec have the manufacturing capacity today to fill these orders? If not, what does the manufacturing timeline over the next few quarters look like?
spk00: Tom, why don't you take that one?
spk01: Sure, yes, we have the capacity. We were confident that the demand would be there for Evolve and would grow quickly, so we designed our processes to be very easily scalable, so we don't have any worries there.
spk02: Okay, great. Two more questions here. Synestec raised a few million dollars through warrants recently, and sort of as you hope to enter this rapid growth phase this year and next, Does the company plan to raise capital by continuing to issue stock warrants, or will there start adding debt to the balance sheet?
spk01: Yeah, maybe I'll take that one, too. It may be a bit early for cash flow-based debt, but we're already using asset-based financing for our production equipment requirements. In addition, the financing we recently did had $5 million worth of short-term warrants, which have to be exercised in about a year or they expire. We have found that these short-term warrants are an excellent source of cash without having to do other deals.
spk02: Okay, great. And final question here, has any competition with Evolve involving the active ingredient entered the market? Anything you can discuss on that topic?
spk00: No, we haven't seen anything, any companies, any other products enter the market. We have a patent pending on Evolve. ContraPest has issued patents around it. So we don't believe that there will be any competition in the near term for sure.
spk02: All right, fantastic. That's the questions we have here on this side. Anthony, operator, I'll turn it back over to you.
spk04: I think this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk00: Sure, thank you. Our goal for 2024 is really all about sales execution while remaining innovative through the introduction of new and innovative products to the market, such as the mouse product we talked about. My excitement is as high as it has been since I joined the company. I believe we have the right mix of product offerings, and team member enthusiasm to fully attack the large and growing rodent control market, a market that is desperately in need of innovation. And fertility control is that innovation, and Synestec is clearly leading the way. So, we thank you for all your continued support.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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