Good day, and welcome to the SenesTech, Inc. Reports Third 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 so much, Brandon. And thank all of you for joining us today to discuss SenesTech’s financial results for the period ended September 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, company’s Chief Financial Officer. 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 questions into the question box and press submit, we will take as many questions as time will permit for. If you are dialed in, you will ask questions by pressing the star one button, as usual. Before beginning with prepared remarks, 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 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. With that said, let me turn the call over to Tom Chesterman, Chief Financial Officer of SenesTech. Tom, please proceed.

Thank you, Robert, and thank you to all of you participating in today’s call. All of us at SenesTech appreciate your ongoing interest in the company. We issued our press release on the third quarter 2018 financial results earlier. I would also mention that we had a virtual investor conference call on November the 1st where we talked in detail about sales and the sales process. If you need either a copy of the press release or a replay of the conference, I would direct you to our website. I won’t try to cover all of the same ground as the call or the press release, but I would like to provide some comments on the quarter’s results. As you saw in today’s press release, revenue for the quarter was $105,000, more than six times compared to last year’s third quarter and virtually tripled on a sequential basis what we generated in the second quarter of this year. As we mentioned in the press release, we view this past quarter as an inflection point of source. From our standpoint, it is tangible evidence of the successful initial deployment of ContraPest into key markets and it acts as a springboard for the future adoption growth of ContraPest. During the quarter, we continued to expand our distribution channel, adding Geotech Supply Company and Agri-Turf Distributing of California. These distribution partners will strengthen our presence in California, which is certainly a key market. We also signed a distribution agreement with Forshaw, a distributor with excellent market presence in the major East Coast markets. Going forward, revenue generation will be positively impacted by the removal of Restricted Use Only qualifier from the label on our ContraPest product by the U.S. Environmental Protection Agency, which occurred subsequent to the end of the quarter in October.…

Thank you, Tom. I really appreciate it. And before I begin with my comments, I would ask all of us on the phone to take a moment and think about all the people and animals that have been displaced in the State of California with these treacherous fires. We’re working as closely in California as we are. Many of these people are friends. So, let me move into some of the -- add some more color to these numbers. In our virtual conference call, we covered a lot of ground. I think the most important piece in that call is seeing how the company’s overall profile is beginning to sack not only not only in the pest management industry, but in the industry of safety, food safety and many of our verticals. And so, we’ve used our website and I would encourage all of you to go to senestech.com and take a look at that website. And I think you’ll see how different it is from the way it used to be. For the first part of that website, it allows us to dig into where we’re going in our markets. On our home page you can actually see how our product is used and how it’s placed, how it integrates into a pest management program, we’ve added videos. These are things we’ve learned from our customers, videos. How do you actually put it out, how do you screw the takes on to the trees, what does it look like. But I think the most important thing our marketing team has done is on every single page there is a call to action. If you want to know more about the product, you can just tap touch more, learn more. But at the top and bottom of every sheet, I…

Yeah. Brandon, can you provide the instruction on how to queue up please?

Absolutely. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Kevin Ellich with Craig-Hallum. Please go ahead.

Good afternoon. Thanks for taking my questions. Loretta, just wanted to see if you could give us an update first on how things are going in California as well as Hawaii since you guys had the formal launch happened during the quarter?

Sure. In California, we are -- we have a two-pronged approach. We are building our distributors and you can see that on our website. Also in California, we are starting to enter the call of several large groups not only municipalities, but beginning taking a look at the university systems and working with some ag where food production is an issue. Hawaii really is a very close tie to California because in Hawaii we now have our product stocked with our distributor. We are moving out to supply to the PMPs there. I’ve recently returned working with the University of Hawaii to provide product to a very fragile island in the Kāne’ohe Bay, Coconut Island. Hawaii is leading the island ecologies. And I think the other thing about that in addition to sales from those markets, our largest sale will come from California as we predicted, there is no question about that. Some of our more island-specific sales will come from Hawaii. Both environments are demanding something that is more sustainable. And our challenge is working with our PMPs to train them as fast as we can to put that product out. It has also opened us up to I will tell you there is a very large partnership coming with our huge global island ecology group. As they move forward using this strategy because people if you have people on an island or animals on an island, you cannot continue to drop buckets of poison. And that’s what they’re moving towards not doing that anymore. Does that help, Kevin?

It does. That makes a lot of sense. Thanks for that update. And then I guess it kind of segues into the revenue this quarter, it was nice to see it triple or almost triple. But I remember you guys have previously said that July was a record month for you somewhere that $50,000 to $60,000 range and for every record you did $105,000, so over half came in July. Just wondering if you could talk about the lumpiness of how sales trended in August and September?

Yeah. I think -- it’s already complicated enough to do things quarter-by-quarter. Moving into month-by-month when you’re looking at using a distribution channel like ours, you do get lumpiness, no question about it. July was a record month especially because of California and filling the distribution channels there, but also from some other distribution orders. There is no question that some of that probably then led to a slackening off as they did fill their distribution channels and now they need to deplete their inventories and move forward. The other thing that is certainly there is that there was widespread expectation that the RUP label would eventually be removed and there could have been some waiting for that going on as well as people saw that on the horizon and deciding that they much prefer that or that they much prefer the EVO. So, there may have been some anticipation there too that caused a little bit of slackening off from the July trend.

Sure. Now that’s a good segue to this question, Tom, about the Restricted Use label change with the EPA. Our understanding is again now that you have the federal change, you still need to get the states to change, to sign off. Is that correct? Could you give us an update on how that process is going and when we will really see sales start to accelerate?

Yeah. I’ll give you the brief stabs on them and then let Loretta go into any more detail. But you’re right, the states do have to approve. Not only -- there is actually two things they have to approve. One is that when we’ve removed the RUP for EPA purposes that means a new label, a new label doesn’t have the restricted on it obviously. So, the states have to approve that label. Then they also have the restricted product list. And so, then they also have to approve that and that is a technically a separate approval and that process is ongoing. Now during that process, as Loretta mentioned earlier, we can begin taking pre-orders, but we will have to wait for each of the states to give us both of those approvals before we can move forward. Loretta any further comments on that?

Tom, I think you captured it quite well. It’s just a process that we have to move through. And as we get those states, we forward those states immediately to our manufacturing and shipping department so that they can go ahead and send out those orders.

Tom, have you gotten any states yet? And then is it safe to assume you won’t recognize the revenue until the product is actually shipped?

I’ve been busy with the quarter close, so I have not kept up with our internal spreadsheet on what is approved and what is not. I know that there has been quite a bit lot of activity on that. I will answer the second part though, which is to say yes, we bill as we ship and that says we -- and that’s where we recognize the revenue as well.

Okay, but….

So, on the number of states as of this past week and we get those state numbers every Friday, we are sitting at 27 states who have already approved the label. The State of Kentucky has approved the label and they removed it from their restriction list. So, they are A1 complete state. And we look as I said over the next two weeks to six weeks to close in on all of the states.

Okay, sounds good. Thanks guys.

[Operator Instructions] Our next question comes from Gerry Sweeney with Roth Capital. Please go ahead.

Good afternoon, Loretta and Tom. Thanks for taking my question.

Good afternoon. What can we do for you?

I want to talk a little bit about you talked about the promotional costs. Can you maybe segment how much they were and are they going to continue. I imagine there is always going to be some type of the promotional site going on, but as you get more and more green with more distributors et cetera, it’s likely to decline. But any way you can give a little bit more information on that front?

Yeah. As we’ve begun this launch this year, we’ve tried a number of different promotion types. We’ve tried providing one of the easiest ways of getting a PMP to try it as to say we’ll give us your hardest infestation and we’ll give you a month or two free and then you can -- if it’s working, you can continue. We’ve also done a buy one get one free area, so a number of different promotions that we try. The fact of the matter is that this is such a novel approach that there isn’t the ideal playbook for what the promotion should be. In this past quarter, our promotion cost or in fact it’s probably easier to do it just from a year-to-date standpoint. Taking all of the promotions together from a year-to-date has been perhaps a little bit higher than usual. It’s been running a little bit less than 20% gross to net, but that’s -- and I’m not sure that’s going to continue with that same high rate because as Loretta mentioned, we’re moving into a different type of a sale as we look at some of these corporate accounts that are driving things for reasons beyond just the initial cost. They’re looking at the overall cost of a program and the sustainability of it et cetera. So, I don’t know whether that’s going to continue. We’ll continue trying different things. And that’s the most guidance I can give you on that.

Okay, great. And then just staying on the -- maybe on the margin side, you talked about making process improvements et cetera. And historically, I believe this may be incorrect and please correct me if I’m wrong, you are targeting maybe gross margins around 50% plus. Is there any substantial change to that number with the work you’ve done on the manufacturing process or is this a little bit more just the tweaking and being process controls, quality control, et cetera?

No. I think we’re continuing on a trend of improvement, a very good trend of improvement. I think that that’s as a target for gross margins that’s still quite valid. In fact, we may be able to exceed that. There are a number of different parts of the production process that we’ve gotten improved, bait sizes one that we mentioned. The QC program is still fairly intensive and we’ve looked at ways of streamlining that and the cost of materials. Some of our active ingredients and other ingredients are also coming down as we learn how to work that system better. So, I still think that’s a good number for our target. And in fact I think we may be able to increase that number.

Okay. And then Loretta this may be more for you on the mice data and working on that front. Any idea as how long that would take or potentially get that registered for use with mice?

I had gone mute, sorry. Thank you, Gerry. Yes, Cheryl is going to be EPA tomorrow. And we have two options. First option is to ask the EPA to add mice to our label, which means we have to provide a data set, which we have. The other option would be to decide that we wanted to develop a separate product for mice, another with a product that would have a smaller bait box that would be used differently. The reality is we’ll know after this week what the EPA would suggest for us. And we’ve been so successful following their suggestions that that is our strategy to move forward. I’m kind of a riverboat gambler. And I would bet we’re going to add it to the label because frankly if that box is out there and no rats have gone into it and you have mice instead of rats, they’re going to go into the box. So, that’s something working.

I assume that when you add mice’s label, it is same across the board, so no restricted use, toxicity et cetera, et cetera. So, it’s just, hey, you can use it with mice?

Right, exactly. And we do have a lot of customers where they say we don’t have rats, but we have mice. So, then we would be able to say to them our product is also approved for mice. And currently I cannot say that because it’s not approved for mice, but that’s a much faster runway than a new mounted.

With the understanding of maybe some regulatory issues around this question, but I’m assuming that you get similar results with mice as in rats, any distinguishable difference good or bad or different?

No. It definitely maintains a very high efficacy. Mice are more susceptible and mice really love it. So, they take less. And again, going forward, these are the kinds of things our customers will help us with. And as the voice of the customer says, look, we just need some small boxes because they never empty a whole thing because they’re mice, they don’t drink that much. Well that makes a great deal of sense of course. But no, it’s exactly the same as the product for rodent.

Okay. I assumed that. I just wanted to make sure. And then not to beat a dead horse here, but just going back, if you add it to the label is this that the EPA says hey added to the label, is there a process with the states maybe similar to maybe removing the restricted use label or is it pretty quick clean process?

It’s the exact same process. They add it to the label; we had the label approved by the EPA, we then send the stamped approved label to all the states. They accept the label. And then since there is no restricted use, you don’t have that secondary regulatory term.

Got it. Perfect. Great, I really appreciate it. Thank you for taking my call -- questions. Sorry. A - Loretta Mayer Our pleasure.

I would now like to turn the call over to Robert Blum for any questions from the web.

Yeah guys. We have a couple of questions here and a few have already been answered. Tom, this one I think you touched on a bit already, but anything you care to add on the discussion of net sales numbers. How much of that was sort of the giveaway of any free months and promotions?

Yeah. I think we’ve already covered that one.

Okay. Next couple questions here relating to guidance, any guidance or expectations for the upcoming quarter or goals that you might have?

Yeah. We do not as a policy provide guidance yet. Frankly the data points aren’t sufficient to give us an absolute predictable level to provide to the street. So, we do not provide future guidance at this time.

All right. And one further question here. Could you give us some estimates on what it will cost typical customers to use ContraPest? How much will be continuing maintenance as a percentage of the initial use?

You know that’s a really good question. I think you first have to define what is a typical customer. And what we’re finding out is that there is no such thing, every customer is a little bit different their infestation is going to be different. The other thing I think is important to keep in mind here is that ContraPest is most often integrated into a service. It’s a product that’s integrated into integrated pest management services provided on a monthly subscription basis primarily. So, how it is actually deployed and where and how much it costs and how it’s billed, those are really things that have to be decided in conjunction with and by the pest management professionals that are deploying it out on the field. So, I don’t think we can give a really good no to that. What we will say is that we do believe that based on the fact there is not a rebound and the fact that it does work, it is efficacious in reducing populations that actually the cost over time may go down of the materials. But that is -- again, this is part of an overall service and how that service is packaged by the pest management professionals is really what they do, not what we do. Loretta, do you have anything else to add to that?

Loretta?

I guess we’ll move on.

Okay. Yeah, I’m not on board with Tom there. I do think one thing that’s really important is when you look at the two separate segments, when you’re looking at the Pestmanager who is selling a service, they do not want to lose that. And if they can prevent the feeling on the customers’ behalf of oh my God [Technical Difficulty] get down again, I’m going to try somebody else. We can help them retain that customer. On the other side of the coin and which is a huge savings to the PMP. On the other side of the coin for the customer, the customer in some cases if they have a certain environmental sensitivity, they really don’t care what it cost. And I mean of course within bounds, you’ve got to be within your budget. But to watch it go down because it’s very simple, if a rat eat it, it won’t reproduce. If it doesn’t reproduce, there are fewer rats. As you have fewer rats, you use less product unless you have a massive invasion from your neighbor next door who is a garbage truck company or something. So, I think it’s just -- it’s very simple in the mind this is how it works. And as we grow, we can go from the very simple common sense to the nut and bolt and population models and value models over time that are really founded in serious evidence-based results. Thank you, Robert.

All right. Thank you, Loretta. And it appears we have no further questions at this time. So, Loretta, any closing remarks that you might have?

Thank you, Robert. It’s really a pleasure to be on these calls for me. We appreciate the continued interest and time. And I want to say that we’re all in this together, our employees, our users, our investors, the planet, our customers. And we would encourage you to help us by visiting our website and giving us any feedback because again it’s the voice of a customer, the voice of the reader, the voice of the investor that helps that rising tide to lift our boats. So, we think that this carries quite a responsibility and a need for continued learning and I want to thank everyone for being with us today. Robert?

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