SenesTech, Inc. (SNES) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the SenesTech, Inc. Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. [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 very much, Gary, and thank all of you for joining us today as we discuss SenesTech's fiscal year 2019 financial results for the period ended December 31, 2019. With us on the call today are Mr. Ken Siegel, the company's Chief Executive Officer; Mr. Tom Chesterman, the company's Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. Before we begin with prepared remarks, we submit for the record the following statements. 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 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 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 Ken Siegel. Ken, please proceed.

Thanks, Robert. Good afternoon, everybody, and thank you for joining the call in some trying time. As you saw from our earnings release, at a high level, we essentially met expectations for the quarter, and that included our third consecutive quarter of sequential revenue growth, albeit on a small base. And we successfully moved forward on a number of the initiatives we've been discussing since I came on board last May, which included the need to reevaluate our sales and marketing strategy in order to drive successful long-term adoption of ContraPest in the marketplace. To that point, as I've said in past calls, we needed to be more focused on our end-user verticals, we needed long-term studies showing efficacy in the field in addition to the mathematical models and laboratory studies that we've used before. And we needed to have experience-based models for their value and efficacy of ContraPest for pest management professionals and their customers. During the quarter, we made progress on all these important points, while simultaneously advancing additional strategies, including the launch of our brand-new direct-to-consumer e-commerce solution, which we're very excited about. I'll go through this in more detail in a few moments. But first of all, let me take you through my learnings after nearly 9 months on the job, provide some greater detail into why revenues have been taking some time to develop and remind you of our overall strategy in moving forward. I'll then ask Tom to provide some color on the financials and the other initiatives we're working on. The need to prove the economic value of ContraPest has been a key learning for us and is driving many of our current initiatives. As you know, the initial cost to deploy ContraPest is more than the cost of conventional rodenticide. Consequently, PMP, and in some cases, end users have experienced sticker shock when deciding whether to buy and use the product. At the same time, we believe that PMPs think that ContraPest is a sterilant and once deployed, eliminates the need for future servicing. We believe this is a key factor in the unwillingness of some of them to buy and use ContraPest as well as a factor in the overpricing being exhibited by those who do. Essentially, some PMPs may fear using ContraPest because it works, thus damaging their business model. To address this, we needed to do several things. First, we need to clearly demonstrate the long-term usage requirements of ContraPest, both when used as part of an IPM program and when used alone. Most of the studies that were done historically were long-term laboratory projects designed to provide the data necessary to achieve EPA registration. We realized last year that we need to have longer term field studies that demonstrate exactly how ContraPest works in the real world. Our plan is to complete several studies of a year to at least provide the necessary data set. We're currently 6 months into most of the studies in our various verticals and are seeing the results we expect and that will need to drive further sales. Frankly, we're very encouraged by the results that we've observed to date. Most critically, we need to demonstrate the time when the use of ContraPest shifts from active deployment to maintenance. Although this will be -- this will vary based on the risk of in-migration from other locations, what's called the edge effect. We believe that stabilization and thus maintenance will begin in approximately 9 to 12 months. At that point, the amount of ContraPest required and the related maintenance will drop significantly. Importantly though is that the need for ContraPest won't go away entirely. And enlightened PMP will realize that the most effective economic model for them will be to treat ContraPest essentially as a subscription product, one that requires continued application in servicing for long-term efficacy. This should, in turn, generate increasing profits to them as their product and service costs decline as the maintenance requirement begins. Most importantly, PMPs need to understand that using ContraPest will not kill their business by simply making rodents go away. In fact, they need to keep using ContraPest to keep rodents from coming back. Similarly, we need to be able to demonstrate to end users that the initial cost of ContraPest is justified, not only by its safety and efficacy, but by its ultimate enhancement to their bottom line. The actual data needed will again vary by vertical as well as the sensitivity of the end user to environmental and sustainability concerns. However, in critical markets like poultry and egg production, we are focusing on how the use of ContraPest dramatically reduces grain loss as well as animal predation to provide a compelling case not only for poultry, but for all segments of food production. Similarly, in our work in retail, we are demonstrating how the reduction in rats significantly reduces product and infrastructure damage. This is not simply the matter of a few ounces of lost grain or other food stuffs. Once damaged by a rat, the entire product or package needs to be disposed of. Losses for the average retail location are often in the thousands of dollars per month against which the cost of ContraPest isn't even a rounding error. Finally, in municipal and government use, the bottom line is less clear. We've been focusing on infrastructure damage and citizen complaints up to this point. But now with the acute focus that the current coronavirus crisis is placing on public health issues, for enhancing our focus on the importance of removing disease vectors like rodents from areas in which they come in contact with people. At the same time, we have data scientists' combing through all of our historic data sets to mine the data for support of our operating theories and thus, accelerate the process of getting us the proofs of concept that we need. The bottom line here is that ContraPest represents a next-generation approach to managing rat populations through fertility control. It's entering into an industry plagued by the reliance on lethal rodenticides and with a history of failure to achieve a sustained reduction in rat population. We firmly believe that ContraPest can become a brand leader in the global rat control market as we position the field data successes for customer acceptance. An additional learning for me is that ContraPest is currently limited by EPA requirements to indoor use and to outdoor use within 1 foot of manmade structures. In order to broaden the usability of the product, we need to complete and submit to EPA a number of additional studies, principally related to the effects on other animals and fish if it's injected or if the product enters the water supply. We're currently working with EPA to prioritize the test we need to complete and hope that we will get similar expedited treatment for our submissions given the more environmentally friendly nature of our product. In addition, we've begun work on new formulations of the product, particularly solid and semi-solid variants. Although these are not essential to our near-term plan, we believe that nonliquid formulations will significantly expand the potential uses of ContraPest as well as pave the way for future sales through retail stores. Our plan is to accelerate the reformulation process through partnerships with others in the industry who will be able to give us access to proven technology, thus reducing potential development time as well as shortening the EPA approval process. As I mentioned at the beginning, we are excited to be entering the direct-to-consumer market. This new initiative uses the power of our e-commerce solution that we launched last December. The D2C program goes live this week and reflects one of our most ambitious projects to date. The purpose of the new program is twofold. First, we've learned over the past year that a significant portion of the residential and small business market is unable to have ContraPest deployed at their locations due to the unavailability of license pest management professionals to provide deployment and servicing. These people have been reaching out to us to provide a solution. This week, we will launch a starter kit as well as a series of simple to follow videos, providing instruction on how to effectively use ContraPest. We will also be launching a monthly subscription service that will send a new supply of ContraPest automatically for a discount from the regular retail price. Second, we've learned that a number of PMPs that deploy ContraPest are adding a substantial markup to both the product and the related service. They do this despite the service protocol for ContraPest being essentially the same as other products deployed in base stations. We expect that by having a widely known retail price as well as simple instructions for use, we can enforce some level of price discipline among the PMPs and thus help drive further end user uptake. This will be enhanced by other initiatives I mentioned earlier that will help PMPs better understand the economic value to them of using ContraPest. So with that as a background, where do we stand? In Washington, D.C., our deployments continue to show a high level of product consumption as well as an over 70% reduction in the ratio of juveniles to adults. This reduction is the key to demonstrating that both birth control is working. We're now working to create visual proof of the actual reduction of rat activity and the allies that we are targeting, and should have that assembled in the next few weeks. While an absolute reduction is always a challenge to prove in an area that has a high in-migration risk, the reduction in juveniles has us optimistic that this is exactly what we will see. Based on my conversations with officials in the district, we believe that this final proof will enable us to go to wide-scale deployment in the next few months. In San Francisco, we've completed a highly successful initial deployment in the park and the second deployment is underway. Key in San Francisco is getting proof of efficacy and safety to the manager of green purchasing and IPM programs for the city of San Francisco. Manager's approval is necessary for us to get on an approved pesticide list in San Francisco. Based on our recent results, we are optimistic that we will obtain approval and be included on this list by the end of the third quarter. Our poultry tests continue in California. We are testing new bathing systems that are more easily accessible by roof rats and simpler to maintain. Consumption in the facilities has been very high, indicating that we will be seeing a significant reduction in juvenile when we begin population assessment in the next couple of weeks. We plan to begin deployment at another poultry location in the next few weeks. In each case, we will be collecting data regarding grain loss and chick predation in addition to rat population data. This will not only help prove efficacy, but cost-effectiveness as well. As I mentioned before, demonstrating reduced consumption and contamination of grain supplies will be critical as we move along the food chain to other facets of food production, transportation and storage. Our retail study has expanded to additional location. One issue we have had though has been interference with our base stations by PMP servicing those stores. We're working with the customer to resolve this issue as well as identifying other locations that we can directly service without the presence of an incumbent PMP. Our comprehensive study with Island Conservation is moving from the planning stage to deployment in April. We're using this study to fill in as many blanks in our data sets as possible. We're also exploring an alternative development approach that will more quickly demonstrate the transition of the product from active deployment to maintenance. Finally, I've renewed our outreach to major PMPs to see how we break through their reluctance to deploy this next-generation technology. My expectation is that the valuation work we will be doing will be critical to these discussions, so they are timely commenced as the data comes in. So what's next? As I mentioned before, public health issues are now in acute focus globally because of the current coronavirus threat. We've already been focused on this through our work with municipalities and government agencies. However, as I've said before, much of the local focus has been on the nuisance of rats rather than their potential as a significant carrier and vector for disease transmission. Although rats are not directly implicated in coronavirus transmission, they are often associated with serious epidemics due to their proliferation and their close proximity to humans. As the focus moves from containment of the current pandemic to prevention of future disease, we believe that rodent control will become a critical area of focus. So in addition to our studies in the U.S., we're in active negotiations with a major Chinese company to distribute ContraPest in Greater China, including Hong Kong. We hope to conclude negotiations shortly. As part of the contract, our distributor will assume responsibility for regulatory approval, but we will maintain control over the formulation and manufacturing of the product. As part of the deal, we're launching a major demonstration of ContraPest as part of an IPM program in Hong Kong. Initial target will be 180,000 square foot multistory market in the city that will provide us an opportunity for a high-profile showcase and ultimate success. We're working through the requirements to bring ContraPest to Hong Kong, but we're hopeful to start this project in the next month. As many of you saw, Steve Krause joined us a few weeks ago from Valent BioSciences as our new Executive Vice President for Sales and Marketing. Steve has extensive experience in both sales and marketing in biorational pest solutions like ContraPest. He's been a leading figure addressing critical public health issues through pest control and has successfully brought a number of premium priced brands to market. He also is a key understanding of what it will take to drive market acceptance of ContraPest. Steve has already hit the ground running and is driving progress across multiple fronts. Finally, all eyes are on direct-to-consumer. As I mentioned, this site launches this week with a major digital and social media splash. And we're very excited about this launch, and we're optimistic about its potential for success. And with that, let me turn things over to Tom for the numbers.

Thank you, Ken, and greetings to all. Let's start with revenue. Revenue during 2019 increased sequentially each quarter, $19,000 in the first quarter, then $24,000, then $36,000 and finally, $64,000 in the fourth quarter. This fourth quarter number could have been a little bit higher as a couple of late orders we expected did not materialize. Fiscal year 2019 totaled $143,000 versus $297,000 in fiscal year 2018. This decrease year-over-year is due primarily to a large sale in December of 2018 to a customer that did not place a reorder in 2019 as their deployment has been slower than they anticipated. What we all thought was a 6-month stocking order turned out to be more than a 12 months' supply. Turning now to the bottom line. On a GAAP basis, net loss for fiscal year 2019 was $10 million compared with a net loss of $11 million -- $11.9 million for fiscal year 2018. This reduction of loss was driven by a reduced stock-based compensation primarily. Adjusted EBITDA loss is a non-GAAP measure of operating performance that we think can enhance the understanding of operating performance and trends. For fiscal year 2019, adjusted EBITDA loss was $8.2 million versus $8.0 million in fiscal year 2018. Fiscal year 2018 results include about $300,000 of unusual and nonrecurring legal and litigation expenses. I would view this trend as neutral to perhaps a little down. This does not make evidence the shifts we have made to our cost structure, though. Throughout the year, we have been shifting resources from the pure science in the past to more focus on commercialization. Towards the end of the year, we expanded our goal of transition to include optimization. Specifically, we added a goal of reducing our burn rate by $1 million per year. Steps to support this have included: a reduction in head count, the departure of our 2 cofounders, doctors Loretta Mayer and Cheryl Dyer, carry as cash severance costs, but will ultimately result in reduced expense. Other terminations in the first quarter of 2020 will also have a lesser severance impact. Overall, we should see a reduction in head count expense in the coming quarters. A relocation of our front office to more compact and less expensive space in Phoenix as well. In addition to the improved cost of the space, the Phoenix location also improves travel cost in time and allows us more immediate access to our customers. Our manufacturing and back-office functions remain in Flagstaff. We've also refined our manufacturing processes. Our manufacturing team has done a great job of improving the supply chain and the manufacturing process during the year, and we enter 2020 with expectations of meeting or exceeding a 50% gross margin. Let's now turn to cash. As cash concerns are more immediate, I need to include more recent events to give you the best sense of where we are now and where we're going. During the first quarter of 2020, the company announced the closing of 2 separate registered direct stock offerings, totaling $1.7 million in net proceeds. These were opportunistic shelf takedowns. Cash at the end of 2019, together with the net proceeds from those offerings, was $3.6 million. At our previous burn rate of approximately $8 million per annum, that would imply about a 6-month cash run away from the end of last year, though hopefully, our burn rate reduction efforts mentioned above will extend that. Recognizing that additional financing is likely needed, we also filed an S-1 recently. We will be amending this for the fiscal year financials. This allows us the flexibility win and if conditions warrant and/or we identify a strategic investor to raise a more substantial amount of capital than a shelf allows. That said, our preference is still to raise cash via revenue and to have warrants exercise when the stock price increases. As a reminder, our full press release on earnings is available on our website. Furthermore, we expect to be filing our 10-K shortly, where the complete financial picture for the year will be. At this point, we'd like to turn the call over for questions. Operator, please open them up.

[Operator Instructions] The first question is from Ian Gilson with Zacks Investment Research.

Could you kind of expand basically on the -- basically, the San Francisco site. How many sites there are currently and we are adding 1 site -- or will be written here. What is the potential site number if San Francisco decides to go to a full coverage?

So Ian, it's Ken. Right now, we are in 2 sites in San Francisco, one is a park, one is a restaurant type complex. Essentially, we need those 2 in order to demonstrate to the manager a safety and effectiveness of the product. Once that's cleared, we're on the approved list for all locations in San Francisco. So it's essentially -- this is rather than simply a matter of incrementality, this is a gate to open the entire city to us. So I mean basically, it's every municipal building, every municipal location within the city.

Okay. Would that be a staged rollout out? I presume, that's more likely.

Well, essentially, what it is, as we get on the approved list, and then they are capable of buying it from us. We don't expect it will be a massive influx immediately. It will take some time as they become aware of the availability. But it really is a step change in terms of what it is we can do with them too.

Okay. You're going to have to market to each individual point of placement?

Similar to what we've been doing, essentially, we would continue with our marketing campaign together with e-mail and social media marketing. But this will end up on a list that every locality in -- every building, every building manager, the park officials, et cetera, will have access to. So they'll know immediately about the availability of ContraPest. It will be up to us to use our own marketing to make sure they start buying it.

Okay. And when you talk about a high consumption in Los Angeles, in general, this high consumption mean there are more rats in total or the fact there is a pathway that the rats use in that particular instance, more than other pathways, which may be in use in other areas?

It's a combination of factors. Very high -- the consumption we're doing on a base station by base station basis. So we would be putting base stations into the high-traffic areas where we expect rats to be located. And the number of base stations deployed also is based on an assumption of how many rats that are there. So when we talk about consumption, we're talking about the amount that's being consumed by each base station, which we believe is then indicative of the fact that a broad segment of the population within that text area -- of that test area is actually consuming the product. And then because we know consumption directly correlates with reduced fertility, we expect the next phase after we see the high consumption to see a drop in juveniles across the board.

Okay. The other items that you've spoken about in the past, including the Arch in that area? How are they doing?

The initial park is still clear as far as we know. They've moved to another park, where they're deploying now and they're seeing similar success. One of the things that we are working on with them is the continued deployment model because we're concerned that even now they have essentially eliminated the population there. If they don't continue to have ContraPest deployed, they'll ultimately start to see a rebound. So there's more work that has to go on in St. Louis, just to make sure that we're showing the long-term efficacy of the product. But right now, the rats are gone in the initial location and they're declining and the one that with recent deployment.

Let's say rats are gone, would the proprietor or the user of the site, decide that they no longer need to use base stations so you continue the education?

Yes. And this is where we need to educate them, okay? This is where the pest management professional there who happens to be a good customer of ours, believes that they can stop deployment. We know, particularly, given the fact that this isn't a municipality, you have edge effect issues. And that in order to avoid the rats coming back, they are going to need to deploy. So that's conversations we're having with them now. The other thing is we still need our own research to be completed in terms of at what level he needs to continue to deploy. So we're hoping that we can work with him to demonstrate how it is with a reduced amount of ContraPest, he can continue to maintain the level of 0.

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

Well, thank you all again for joining us. I realize it's a very interesting time for everyone. In some respects, as terrible as the situation may be globally, this is actually an interesting opportunity for the company. In some ways, I wish I didn't have the ability to say that. But frankly, the whole issue of disease transmission is a critical element of what it is we do and what it is we are controlling for. So with that, again, thank you all for joining. I hope you all stay safe and you stay healthy, and look forward to talking to you again next quarter. Thanks, everybody.

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