SenesTech, Inc. (SNES) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon and welcome to the SenesTech, Inc. Second Quarter Fiscal Year 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

Thank you, Austin, and thank you for joining us today to discuss SenesTech's financial results and corporate developments for the second quarter of 2018 ended [September] [ph] 30, 2018. With us on the call representing the Company today are Dr. Loretta Mayer, Chair, Chief Executive Officer and Co-Founder of SenesTech, and Tom Chesterman, Chief Financial Officer and Head of Commercialization. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. Please note that listeners, both on the live portion of the call as well as Webcast, will be able to ask questions. If you are on the Webcast, you can type your question into the question box and press Submit. We will take as many questions as time will permit for. If you are dialled in, you will ask questions by pressing the *1 button, as usual. Before beginning with management's comments, 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 the 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 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 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 a result of the receipt of new information, the occurrence of future events, or otherwise. We'll begin today with remarks from Tom Chesterman, Chief Financial Officer and Head of Commercialization, after which we will hear from Dr. Loretta Mayer, Chair, Chief Executive Officer and Co-Founder of SenesTech. Tom, please proceed.

Thank you, Robert, and good morning to all of you. We appreciate you joining us today for this call. We just released our second quarter financial results. If you need a copy, please visit our Web-site. We expect to file our 10-Q tomorrow and you can get a copy of it from our Web-site or from the SEC directly. SenesTech is now ready to take the next step in its development. Since our last quarterly call, ContraPest has been approved for sales and use in the state of California, we entered into two new distribution agreements, and added a number of new pest management professionals to our roster of customers. I can unequivocally state that the last three months have been the most active and exciting months in the history of the Company. We have known for a long time that there would be a tipping point for this product and it is our strong belief that we have in fact reached that tipping point. For everyone who had made that comment that it was a matter of when, not if, that 'when' is now. Let's go into a few reasons why we believe this. First, we began our commercialization campaign in April of this year, focusing initially on acquiring customers, getting pest management professionals, or PMPs, to try out ContraPest as a part of their integrated pest management plans. It takes time to get PMPs to adopt something, so we did not expect immediate revenue results in the second quarter. We were instead building the base, and this approach resulted in strong results in July. As we announced back on August 1st, we generated more than $50,000 in the month of July, our best month so far. Second, we received approval for sales in the state of California. California is a particularly important market for SenesTech, not just because it is the fifth largest economy in the world and in the top three largest markets for pest management in the U.S., but due to its desire to seek proven non-lethal solutions that can be added to integrated pest management protocols to bring rat population down and keep them down while also reducing the usage of lethal methodologies. California represents a large revenue generating opportunity for us and we are focused on fully developing this opportunity in the months and years to come. Just recently we formally launched sales in Hawaii. We believe Hawaii is another very important market, similar to California, where they have a strong interest in integrating innovation and non-lethal solutions into their integrated pest management protocols. We have begun training and supplying local pest management professionals and distribution partners, and have customers deploying the product. One key customer that we are pursuing is Hawaiiana Property Management Company, an organization with over 700 homeowners associations and commercial properties under management in Hawaiian Islands. I'll let Loretta discuss the Hawaii opportunity a bit further. And then on a more macro basis, we continue to expand our network of distributors and pest management professionals throughout the U.S. One recent development was with Forshaw, with already stocking product and with whom we have a number of promotions and projects in our lineup for our work with them. We expect to sign one or two more distribution agreements within the coming days. Forshaw and other industry participants are now actively working with ContraPest and working ContraPest into their service offering to provide more effective solutions for their end-user customers. As our universe of distributors and PMPs continue to grow, ContraPest will increasingly become a critically important component in the overall pest management process. In addition to our existing distribution and customer agreements we have in place around the U.S., we are actively pursuing agreements in key sub-segments of the market, such as agriculture and protein production where ContraPest can be especially effective given its characteristics. We hope to be able to speak more to you about these in the coming quarters. Now as many of you are aware, given the particularly large growth opportunity within California and the immediacy of the traction we see us attaining, we pursued a rights offering strategy to raise capital to further capitalize on this strategy. We believe the rights offering provided our existing shareholders the opportunity to avoid dilution while participating in what we believe is a significant upside into the future. Today we closed that rights offering with approximately $6.2 million in gross proceeds, which is in excess of the $4 million to $6 million we were seeking to invest in the commercialization of ContraPest and capitalize on our opportunities in California and Hawaii. We deeply appreciate the support of our shareholders in this. For centuries, rodenticides or rat poisons have been the default solution in trying to manage rat populations. It has not been enough, and as one commentator put it, 'the rats are winning'. ContraPest brings significant innovation to the industry by rendering rats infertile as they continue to ingest the ContraPest formula. We have demonstrated with [indiscernible] that when used in an integrated pest management approach, ContraPest helps keep rat populations down compared to the use of lethal methods alone. The data showed in areas where ContraPest was used in conjunction with other tools, the rat populations were controlled or reduced, while areas that only used lethal tools showed sometimes explosive growth. The utilization of ContraPest plus rodenticide showed better efficacy than those areas treated with rodenticide alone. This scientific validation and industry demand is finally beginning to culminate into sales. July saw record sales, as mentioned, and we are just beginning to scratch the surface of this market opportunity. We know that this has been a long journey and we appreciate the support of our shareholders and everyone that has been instrumental to bringing us to what we believe is the beginning stages of radically changing the landscape of the pest control market for years to come. Let me now turn the call over to our Co-Founder and CEO, Dr. Loretta Mayer. Loretta?

Thank you, Tom, or should I say mahalo. These are indeed exciting times and I want to thank you for your commercialization lead and watchful eye on the opportunities ahead. It's been my pleasure to not only have co-founded the technology, but focus on the building of the business. The potential and future of our technology is very large and the successful approach is to move with the innovation of the product. Today, that product is ContraPest. Let me illustrate what I mean by this with a few examples. California is indeed of great interest to us, or I like to think of it as, as we pull our chair up to one of the largest economic tables in the world, we must carefully and methodically approach this banquet. The opportunities are many and the customer profile is varied. Cities – these cities are not unlike New York, Chicago, Boston, and Washington DC, there are enormous agriculture opportunities for us there, wildlife, recreation, tourism, large clean high-tech industries, and an overlay of environmental and wildlife consciousness. I sound like the Chamber of Commerce for California. In full disclosure, it is my native state. Indeed, however, a lot of off-ramps on those freeways exist and we must be disciplined when we are building for the long haul. And I believe this is where Tom and his commercialization team have put in a great deal of effort, and I think it will be proven to be extremely valuable as we mount our numbers in the coming months and quarters. Our approach is measured and focused on our customer model, the PMPs if you will, and building their value proposition. What do they need to improve their jobs, what is the pain they are feeling, and what is an opportunity to gain in their markets by utilizing ContraPest? Need, pain, gain, that's pretty common to just about anything and everything. But the features and benefits of our product are many. Our seasoned team can sharp with our focus as we begin this California journey, and that they are. California presents however an emerging environmental stewardship that we are seeing in three predominant space. We are seeing it in California, Massachusetts, and Hawaii. The impact for the pest control industry is to reduce the threat that poison-based lethal approaches poses to wildlife and the continuing reliance on lethal chemicals in our environment. These are conversations that I am really pleased SenesTech has joined in, because our customers, the pest control professionals, are up against problems that require analysis, balance, public awareness. I really want to focus on balance, and as I learned from our commercial teams, our sales, our marketing, that you cannot go too far in one way or another, and the fertility control solution that we are bringing to these PMPs spur balance in this challenge. So, a comment on Hawaii and what's happening there and how we are growing; it's extremely exciting and you have to balance, again, what's happening in Hawaii, the sensational and disturbing growth of rat lungworm disease, the rodent decimation of native birds and plants, the difficult effort to eradicate rats without poisoning the land and sea animals. We are drawn to this challenge obviously by the environmental community and we have spent over two years this month in fishing through data collection on large one-year studies that we are conducting with the Oahu Army Natural Resources Program with very positive results. And I'll just give you a slight recap into that. This week we have finished the final collection of that data, and one of the things that native Hawaiians and the management groups in Oahu believed was that any product, no matter what it is, could not overcome the appetite satisfaction of the strawberry guava, that is now blooming three times a year. The first amazing data point for us is [indiscernible] ContraPest. I'm not sure I'd have ContraPest jelly, guava jelly is much better, but the rats have chosen to eat it. And as you all know, if a rat eats it, it will not reproduce. If it doesn't reproduce, there are fewer pups. Right now we are collecting the data that will allow us to make population estimates with the [indiscernible] personnel. We are also engaged with discussions of environmental and conservation groups, which is spreading to other islands, because they want to use our proven product to address their particular problem. Hawaii is also home to one of the largest tourist and vacation markets in the world. As such, the housing for hospitality and vacation residents has given birth to multi-residential complexes that can indeed boggle the mind in Honolulu. Now, remember, rats are commensal, and what that means is that they feed at our table. They have travelled from China all over the world and they have crossed the oceans. They need food, shelter and water. No surprise they picked Hawaii. Our newest partner in this pain to these residents is Hawaiiana Property Management Company. As Tom described the company, it is a large management company that really represents hundreds of thousands of residents through homeowners association. They have welcomed our technology to improve the living conditions of their residents. This market opportunity is in the high millions and we are approaching it with a valued expert in the field with Hawaiiana. We are learning that the need, pain, and gain for this market with this complicated customer profile takes some learning, it takes some data collection, and we therefore have committed a full-time person to the island to care with the continuing expansion of our opportunity in this kamaaina culture. Kamaaina means, 'for the land and people'. The other thing that I would like to comment on, as my job is to provide a high vision of where we are going, what opportunities are available for us, what pipeline needs to be tapped, and in doing that we listen to a great number of markets. One that we have recently commented on is the state of a market, rodent control in food facilities. What's very important about our stepping into that market is that food facilities not only lose food, but they also have compliance issues with keeping rodent contamination from food production. That's where you get to that zero tolerance. Our early discussion has led us to believe that this is an excellent niche for us and we're looking forward for more in that particular area. Regulatory is something that Tom has asked me to comment on, and I think you have to continue, as we have always done, to look at it as a pathway, and it's a journey that's best taken on side-by-side with our regulatory agency, and I could not be more grateful to the officers of the EPA that we have worked with. As we emerge in these new markets, we are continuing to innovate our product offering with changes to our label. To remind you, we have changed our label once before where we extended it from indoor-only to within one foot of a man-made structure. This allowed us to capture some other needs. And our working with the EPA is continuing to follow this dynamic feature of the new product in the market. As we learn more and collect more, we can work through our regulatory agency to update our label. As with our change in that placement of our product I just mentioned, there is another change that we have been asked to consider to expand our market opportunity for our professional pest managers, and that is to change our label from restricted-use to general-use. That has required us to present additional information to the EPA. We have done that and we are right in the middle of that process. Again, we are a company that believes we have to be innovative, we have to be dynamic, we have to listen to our customers as well as our end users. According to our gurus in the commercialization field, they are expecting this change of the label to perhaps provide up to a 50% increase in our PMP availability. Another improvement that we are making and that we have advised the EPA of is launching our product in the EVO Express. That's a bait station that is most used by our PMPs and they have asked for it. I guess this is where I would say, we always think outside the bait station, but maybe not. With the large roster or data set that we are collecting with the U.S. Army, we are preparing yet another data set for the EPA, enough to expand our use to full outdoor. This will be extremely valuable to our agricultural users but our island ecology users require, in addition to full outdoor, they are requiring a formulation change perhaps to accommodate aerial dispersions. Each of these are examples of how innovation will drive the continued changing of our regulatory profile and this process is carefully planned and executed with our offices at the EPA. I also want to comment on something else that is starting to change here at SenesTech and that is additional talent on our Board of Directors. As we build this business, we are continuing to build our Board with Dr. Jamie Bechtel taking the lead as independent director. We're expanding the hands-on guidance for acceleration in support of our commercialization effort. At our last Annual Meeting, the shareholders voted Delphine Francois Chiavarini to the Board, and with her vast experience at commercialization, innovation, and disruptive technologies, she is chairing the commercialization and strategic planning committees of the Board. Delphine's experience reaches that to currently General Manager at Moen. She has come from EcoLab. Her experience in Europe is extraordinary. And her focus is on helping us to make sure our processes and offerings are as innovative as our product. Dr. Bechtel is aligning our Board to focus on our objectives, as measured by key results, to move forward and make the long haul a successful journey. As you have heard now many times before, it's not a question of if, it's a matter of when. At SenesTech, I firmly believe this has been the guiding principle that has maintained our energy, hard work, rapid learning, adaptation, and unwavering dedication. I'm proud to be a part of such a dedicated group of people. As I have come to know building a successful business, as I learned that [indiscernible] of my favorite business mentor, Bill Green, it's all about two things, people and zeroes. The right people will increase the zeroes. Who are the people? They are our investors, our employees, our consultants, and our customers. For sure we are on the right path. Austin, let me turn this call back to you for any questions.

[Operator Instructions] Our first question will come from Kevin Ellich with. Please go ahead.

I guess starting off with the record revenue in California in July, and congrats, it seems like things are progressing very nicely there, just wondering how we should think about the ramp from July, kind of how that's going to build over the coming months and how the orders are coming in from California?

To some extent I have to remind you that in order to get a good projection, you need to have a long history so that you can extend and extrapolate the progress. We don't have that. We just started up in April, and so we have very limited data upon which to give a consonant ramp as to, we'll go this amount in this month and this amount in that month. I think it will be premature for us to do that until we get a couple of more quarters under our belt. What I will say is that we have continued to acquire customers. We have continued to add those customers. We have programs in place. And so, we do believe that we have both the growth from existing customers as well as the beginnings of the multiplier effect, as others are seeing the early successes in the implementation of ContraPest. So, I think we'll be in a much better position to provide guidance after some more data points. In terms of your question about California specifically, we do continue to see the interest growing there as anticipated. But I hasten to add, the majority of the business in July was not from California. It was from outside of California, from programs that we had in effect prior to the approval in California.

Excellent. That's really helpful, Tom. And just one financial question before I jump to Hawaii, G&A expense was a pretty big increase sequentially from $2 million in Q1 to about $3.5 million in Q2. Is this kind of a new run rate level that we should be thinking about and was there anything unusual this quarter, Tom?

No. I think there are some unusual facts in there and I do not see this as a significant increase to the cost structure of the Company. But as you'll see more detail when we file the Q tomorrow, there were some unusual events and unusual charges in there that really don't have to do with – we have not gone on a big hiring spree or anything to that nature. We have however put in place a number of product promotions and marketing promotions that you will begin to see effects in the overall operating expense. So, that will seem to look like an increase in expenses, but really when it comes down to it, what we're investing in is the growth of ContraPest, not in massive expansion of overhead.

Okay, that's helpful. And then, Loretta, you gave a lot of good detail on Hawaii. Could you give us a little bit more color on the Hawaiiana Property Management discussions, how they are going, and I guess what's the timeframe in terms of how long you think it will take to realize that? I think you said high millions of opportunity with them.

Sure. We were invited into Hawaiiana to address their top executives. So, the way they are structured, there are key company executives that manage groups of property managers, and the property managers interact with the pest management professionals. So, the key here is that we are working with an extremely large company who is helping us understand the sales process. Typically we sell directly to PMP or to distributors who distribute to PMPs. In this particular case, you will have an extra piece, which is that homeowners association. And so, with that piece, we have to serve not only the customer who is the end user but also the customer who is the pest management professional who is servicing the property. We are anticipating, and again this is very premature because we just presented on July 27 and we then met with Hawaiiana on the 28th, so we haven't collected a great deal of data, but our plan shows that by securing the first two to three, we'd like to concentrate on Oahu. Yes, there are opportunities on the other islands, but serving the first two or three will allow us to have a learning that will take us approximately six months. From there, then we'll go for a scale-up of our commercialization teams, and I think we will start to be hitting on growing that business in the first part of 2019, up through the second quarter. So, I hope that gives you some detail that you are looking for.

Yes, that's very helpful. And since I have got you, as well kind of last question, the EPA with the label change, seems like that could be a pretty big positive for the Company as well. Do you have a timeframe on that, and I guess how the discussions or indications from PMPs have gone? I think did you say in your prepared remarks, it could increase your opportunity with the PMPs by 50%?

Right. So, on your first question, how do I think it will go and where are we in timing? We have been working directly with the EPA and they have at least probably another one to two months worth of review. It could be faster but I would never speak for an agency that is doing so much with so few people now. As far as the increase from our pest manager, many of these large PMPs have submitted supporting letters to the EPA requesting we make this label change. I think that's indicative of the demand that would be out there. Really a restricted-use product means a lot of paperwork, a lot of record-keeping, a lot of additional steps, licensing, et cetera, that our product, which is a non-lethal, doesn't really require. So, this is not only a very common-sense move but it is also a market expanding move.

Sounds good. Thank you much.

And at this time, I would like to turn the floor back to Robert Blum to answer any additional questions.

Thank you, Austin. Folks with a couple of questions online here. The first one here, have you conducted trials of feeding rats which have consumed your product to birds of prey in captivity or controlled environment, as they may be susceptible to chemicals? Do you have any other evidence of its safety in eliminating rats while protecting other species and what sort of reassurances can you provide on this topic?

Perfect. Have we fed birds of prey rats that have been treated with ContraPest? No, we have not done that because the data that we have shows the concentration is so low, think about 125 gram rat, the concentration is so low of the active ingredient and the metabolism is so fast – so, from the moment a rat consumes ContraPest, in approximately 14 minutes it has completely broken it into inactive ingredients. So, the likelihood that a raptor or a cat would consume enough rats to have a concentration in their bodies significant to have any effect on them whatsoever is extremely low. This likelihood is so low, that's why the EPA did not require this study. Are we concerned about birds? You bet. Have we done a study? We have engaged a study, we have paid for it, and I can tell you it will be part of comprehensive data sets that we will submit to the EPA for our outdoor use, but I will tell you there is absolutely no adverse [indiscernible] effect to birds who have been forcefully devoured with our product. As far as any other information, when you think of other species, you may think of dogs, categories; in other countries, wallabies, brushtail possum, pig. I can tell you that we have directly used our product in these other species and there is no lethal effect.

All right. Our next question here, and this was sort of came a couple of different directions, are there near term or future opportunities to introduce [indiscernible] ContraPest in European or Asian markets?

Someone read the Wall Street Journal article this morning about Paris. Of course there are. We have begun looking into the opportunities in Europe. Of course we have spoken with municipal leaders in Paris. We have also been asked to consider transit opportunities in Hong Kong. We are currently preparing to deploy a project in the British Virgin Islands. And so, we are definitely considering our global expansion. Our business plan has called for us to secure ourselves in the U.S. markets, do a tremendous amount of product learning, secure our regulatory status, and then expand into these larger global opportunities. So, we are on point, we are on time, and I think Paris would be a great place to start. However, the British Virgin Islands sounds pretty good to me too.

All right. Our next question here is, curious as to the ability to talk about whether there is participation from the Board and management in the rights offering?

Yes, there was participation, not just from Board members and management, reporting management, there also was participation from quite a few employees. In terms of the specific participation of Board members and reporting officers like Loretta and myself, that will be part of the required Form 4. So, all of that will come out within three days' time of the rights offering.

And I'll dovetail that question here, Tom. There was an investor talking about getting some paperwork later, is there opportunity to invest and still receive part of the warrant?

Unfortunately, there is not. It was, when we offer the rights offering out, how quickly it gets to the investors really is very dependent on which brokerage house they hold their shares through. Those that hold are what are called registered shareholders, one is that hold it directly in paper, they get the notification almost immediately. Those in other brokerage houses, we had some experiences I know where they got the notification within a day or two, but there are others that also are a lot slower, and unfortunately there was nothing we could do to really change that other than put out as many press releases as we could, putting out as much information as we could, so that people could call directly and kind of jump around their own brokerage house to have it happen. Unfortunately, the rules are though that once we have closed it, we will not be able to reopen it. Sorry about that.

All right. And last question here is, could you provide any color as to the non-recurring G&A this quarter?

I guess this is really a follow-up to the earlier question and I didn't mean to be vague about it. There was one specific very, very large non-cash transaction during the quarter. We alluded to this in the press release. And further detail about it will be in the 10-Q tomorrow. But we did have what's called an inducement, and that is where we approach a large warrant holder and we provide them inducement in order to get them to exercise the warrant and get some more cash into the Company. That's exactly what we did here. We approached one shareholder, or warrant holder, and we induced them to exercise that warrant. We got cash out of it. But unlike other ways of recognizing it, this shows up as an expense, a non-cash expense, called an inducement expense. And so, it's really not something that would be in the ordinary course of business like other operating expenses might. Again, I think that probably a more full-some discussion will be in the 10-Q, and if anybody has questions about that and wants to understand more about it, certainly we can take those calls.

All right. Thank you very much, Tom. With no further questions, I'll turn it back over to management for any closing remarks.

Thank you very much, Robert. I want to thank everyone for joining us today. I know it takes time, and time is precious, but it's a good investment. I will speak with you again next quarter, if Tom and I don't see you before that. Have a good evening and rest of your day. Back to you, Austin.

And thank you everyone. At this time, the conference has concluded. We thank you for attending today's presentation and you may disconnect your lines at this time.