SenesTech, Inc. (SNES) Q1 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the SenesTech, Inc. Reports First Quarter Fiscal Year 2020 Results Conference Call. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I’d like to turn the conference call over to Robert Blum with Lytham Partners. Please go ahead.

Thank you very much, Jamie, and thank you all for joining us today. On today’s call as Jamie indicated, we will discuss SenesTech’s first quarter 2020 financial results for the period ended March 31, 2020. With us on the call representing the company today are Mr. Ken Siegel, the company’s Chief Executive Officer; and 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. At the conclusion of today’s prepared remarks, we will – I’m sorry, 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 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 Ken Siegel, Chief Executive Officer of SenesTech. Ken, please proceed.

Great. Thanks, Robert and good morning, everyone. I hope you are all – you and all your family are well safe and healthy. When we spoke with you on March 16, we were in the early stages of the COVID-19 pandemic and obviously a lot has changed since then. The key factor for us, as with nearly every other company is managing through the uncertainties created by the virus, despite or in some cases because of the virus, we took a number of significant actions to protect the company. And we’re actually able to continue to drive forward with some of our key initiatives. And I’ll touch on that in a moment. As everyone is well aware, the need to have the necessary capital and runway to allow us to achieve our goals and objectives is critical. To address this, in March we substantially reduced our burn rate through some painful but necessary payroll reductions. As part of this, all of our executives and our Board of Directors agreed to a 25% reduction in their salary and fees. Combined, this brought our burn rate down to $6.5 million on an annualized basis. We expect it to drop further in October when some legacy severance payments are completed. Second, we applied for and received a PPP loan of approximately $650,000, which was funded in April. It was also a significant factor enabling us to tap the capital markets in April to provide us an additional approximately $5 million in cash. I’ll ask Tom to review our liquidity position in a bit, but it currently stands at more than $6.4 million in cash on the balance sheet on a pro forma basis as at the end of March. So we believe we’re positioned from a cash perspective given our current run rate get well into 2021 at this time. During the call in March, we spent a considerable amount of time discussing our need to reevaluate our sales and marketing strategy in order to drive a successful launch and adoption of ContraPest in the marketplace. We discussed the need to be more focused on our end user verticals. We needed longer-term studies showing efficacy in the field in addition to the mathematical models and laboratory studies that we’ve used before. And we need to have experienced-based models for the value and efficacy of ContraPest for pest management professionals and their customers. All of this is focused on the need to prove the economic value of ContraPest. Augmenting these initiatives, we also discuss the launch of our brand new direct-to-consumer e-commerce solution. So let’s first talk about where we’ve made some progress. We were able to keep many of our key projects going and by mid April, we’re even able to deploy teams to our key test sites, including a California poultry facility to make sure that that project continued to proceed effectively. We’re beginning to send out additional teams to our other key locations even with stay at home order still in place. Most states and cities recognize that pest control is an essential service and are allowing us to complete our work. That said, we’re extremely grateful to our field service teams who are willing to risk exposure in order to help move the company forward. Two of our most critical studies are passing the six month mark with extremely positive results. Our poultry study is showing an average reduction of rat activity between 44% and 87% and this is on a sustained basis. We’re also validating our assumption that the amount of ContraPest needed for sustained results does decline with the reduction in rodents at approximately four to six months after initial baiting. Our municipal study has shown a reduction of rat activity from 55% to 88% at the four month mark and with those numbers still declining. We’ll be reviewing the six month data over the next few weeks and those studies will continue for 12 months. Although the studies are continuing, we have enough data to significantly enhance our sales and marketing activities in these key verticals and are in the process of completing economic value models for both PMPs and end user customers that will become part of the sales package. This combined with label changes to accommodate our learnings on protocol and delivery, lead us to believe that we are on track to penetrate key markets this year. We were also able to launch our direct-to-consumer service in late March. While the numbers are still relatively small, we are encouraged by the continued growth in sales each week and by the number of purchasers, who are taking advantage of our monthly subscription program. This is also encouraging us to look toward expanding retail at some point in the future. On the flipside, the virus has created a significant number of headwinds. With stay-at-home orders impacting most of the country, we found it increasingly difficult to communicate with current and prospective customers and we’re forced to cancel any and all face-to-face meetings. In addition, bending by commercial and governmental accounts with significantly cutback is everyone grappled with the economic impact to their operations of COVID-19. This included a hold placed on our large retail projects as well as the slowdown in zoos and sanctuaries. Our work with Island Conservation and open spaces was on hold, but has recently been able to recommence. Like many other companies, we’re uncertain as to when these opportunities may come back and at what levels. Well, there are certainly some headwinds. There may also be some silver linings. The disruption caused by COVID-19 is bringing increasing attention to the rat problem in most cities as hungry rats are leaving their traditional locations in areas near restaurants and other food sources in search of food. We expect that there will be significant increases in the rat population in these areas, once the food sources return. This is an optimal time for municipalities to deploy ContraPest to blunt the population rebound. There’s been significant media coverage on this topic from which we will look to make people aware of the solution that ContraPest offers. We started a marketing campaign to municipalities of over 200,000 people focusing on this phenomenon. We anticipate that the campaign will gain additional momentum by announcements that will be coming out with regard to our test program in Washington, D.C. in the near future. There is likewise an expanded media coverage on the overall impact of rats is a vector for disease. Last week, news coverage discussed one of the many situations in which rats are infecting humans, as evidenced by a human testing positive for a strain of rat hepatitis E. As the awareness of these issues continues, and as governments look to get ahead of the curve on preventing future outbreaks, we believe ContraPest could become an important tool in addressing this component of the problem. Before I turn it over to Tom, let me sum up by saying that we have moved quickly to prepare SenesTech to whether the worst of the virus through cost cutting, incremental financing and continue focus on our core strategy, and we believe we will emerge from this current crisis with a clear path to grow. With that said, let me turn it over to Tom for a view of the financials. Tom?

Thank you, Ken, and greeting to all. As a reminder, our full press release on earnings is available on our website. Furthermore, we expect to be filing our 10-Q shortly, where you can find the complete financial picture for the quarter. Let’s start with revenue. Revenue for the first quarter was $37,000 compared with $19,000 for the first quarter of 2019. The good spin on this is that it represents over 90% growth year-over-year. The not so good spin is that it’s still a small base from which we’re growing. Orders from the pest management professionals in the first quarter were expectedly low, but some of this was offset by orders coming in from our direct online sales channel, which continues to develop nicely. From an OpEx side, the operating expenses for the quarter were about even with the first quarter of last year as the cuts mentioned by Ken didn’t occur until late in the quarter. The change that is evident is that we have well balanced, increases in SG&A with decreases in R&D. The R&D that continues is really focused on improving manufacturing processes and pursuing potential label changes from the EPA. Turning now to the bottom line. On a GAAP basis, net operating loss for the first quarter was $2.3 million, compared with a net operating loss of $2.4 million in the first quarter of 2019. Due to the price adjustment feature and a certain group of our outstanding warrants, we also recognize a deemed dividend of $414,000 in the quarter. You can read more about this deemed dividend in the 10-Q which will be filed later today. Adjusted EBITDA loss is a non-GAAP measure of operating performance that we think can enhance the understanding of operating performance and trends. For the quarter, EBITDA loss was $2.1 million, a slight increase over the first quarter of 2019. Let’s turn now to cash and the capital markets. First, during the first quarter of 2020, the company closed two separate registered direct stock offerings, totaling $1.7 million in net proceeds. These were opportunistic shelf takedowns. This brought cash at the end of the quarter to $1.5 million. In April, though we added to that cash balance. First, recognizing the immediate challenges stemming from the COVID-19 pandemic and realizing at that time the capital markets were close to us. We applied for and received a loan from the SBA for $645,700 under the Paycheck Protection Program or PPP. This gave us some breathing room. As a panic from the pandemic subsided and the capital market access eased, we found a unique opportunity to close a $5 million equity financing. These two brought the pro forma cash balance to $6.4 million, which is sufficient to make it into 2021 based on our current projections. Also extending the runway, as Ken mentioned, some of the cash burden associated with legacy severance arrangements will end between now and October. Right now, today, our monthly cash burn is down to about $520,000 or about 25% lower than it was during the first quarter. We will continue to work at keeping it down. At this point, we’d like to turn the call over for questions. Jamie?

[Operator Instructions] Ladies and gentlemen, at this time, we do have a question. This question comes from Ian Gilson from Zacks Investment Research. Please go ahead with your question.

Good morning, gentlemen. Of the ongoing projects, as of, let’s say year-end, I’d say, last year, are they all ongoing? Or have we lost any? And if so, would they be renewed when the COVID-19 get to a low level?

Ian its Ken. The projects as of year-end are almost all now back in process. The one that is still on hold is the one that we were doing in retail. Obviously, since most retail stores are shutdown, it was difficult to get in to do staffing. But everything else is up and running and in fact, now that we have people out in the field who are getting the results in real-time.

Okay. As the right migrate to alternative food positions. Does that mean that you can expect your operations under a current contract basis? Or do you have to go out and basically serve for new customers within areas where the rats have moved to?

Great question. So it’s really twofold. Since a lot of the contracts that we would be talking about and certainly where we’re doing the projects are with municipalities, it would come within the existing arrangement. So for example, the work we’re doing in D.C., they would simply move to additional alleyways and locations. Where you have situations in which it is done by private contracting, it would really depend on which pest management professionals are servicing the new areas. But the key piece is while they’re migrating out, which does create additional opportunities for us outside the core areas, one of the biggest worries is simply when they rebound in their historic locations near grocery stores, restaurants, et cetera. And what we’re strongly advising the municipalities is to begin active deployment now, which will reduce fertility before the rebound can occur.

Okay. As we move back to more and more retail restaurants opening up, would there be an increase in activity and therefore, an increase in sales? Or do you basically discontinue on as is?

It would, as they come online, we would expect an increase in sales. And because the product is a contraceptive and not a sterilant, in order to sustain the reductions, they need to continue to deploy the product. So once they have ContraPest in place, they need to continue to use it or the rats will come back.

Okay. So basically, if we look at number of base stations, we would expect that number to increase as commerce opens up. Is that be correct?

Correct. It will increase. And then as population is brought under control, as it’s knocked down, you would start to see a decline in – not in the number, but in the amount of ContraPest deployed in specific areas, but it would then stabilize at a predictable level. That’s what we’re working on in our studies to figure out exactly what it stabilizes that. But at the near-term, would see an increase in the base stations as they attempt to get control over the population.

Okay. Great. Thank you very much.

You are welcome.

Ladies and gentlemen, at this time, we’ll end today’s question-and-answer session. I’d like to turn the conference call back over to management for any closing remarks.

Well, thank you all for joining us. Obviously, it’s an incredibly trying time for everyone. And again, I hope you are all well. I hope you all stay well. And actually, I’m looking forward to next quarter’s call, so we can begin to see whether everything we’re doing on the sales and marketing side, particularly with all the new data we have, begins to translate itself into sales. So thank you all again, and we’ll talk to you in a few months.

Ladies and gentlemen, with that we’ll conclude today’s conference. We do thank you for joining. You may now disconnect your lines.