SenesTech, Inc. (SNES) Q1 2023 Earnings Report, Transcript and Summary

Hello, and welcome to SenesTech's First Quarter 2023 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.

Great. Thank you so much, MJ, and thank all of you for joining us today to discuss SenesTech's first quarter 2023 financial results for the period ended March 31, 2023. With us on the call today are Joel Fruendt, the company's Chief Executive Officer; and 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, drafts, 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 in which they were made and are based on management's assumptions and estimates as of such date. The company does not undertake any obligation to publicly update any forward-looking statements whether as the result of the receipt of new information, the occurrence of future events or otherwise. With that said, let me turn the call over to Joel Fruendt, Chief Executive Officer, SenesTech. Joel, please proceed.

Good afternoon, everyone. Thank you all for joining us today. Following my appointment as CEO a few months ago, it is my clear goal and objection to accelerate and steepen the adoption curve of ContraPest. We were doing many things well, but there were also areas for improvement. When I first started, I articulated three imperatives: sell better, make a better product and give the customer more choices. We've worked this past quarter to address these imperatives. Let's start with the selling strategy. First, we have redeployed and refocused our direct sales efforts to enhance our customer acquisition capabilities while also putting sales reps closer to the customers to focus on the numerous large opportunities that are available for our unique fertility control product. Next, we have expanded our field sales organization, each deployed by geography with leadership in both the eastern and western half of the U.S. This strong regional focus on new customer acquisition through an expanded commercial team and new depths of vertical industry knowledge to get in front of decision-makers is all designed to tighten the sales cycle and ultimately driving revenue. We've also made some changes in the leadership. I have taken over direct leadership of the commercialization efforts. We are also moving our growth planning and outsourced marketing to a new group, the Dorn Group, with whom I have had success in the past. Moving now to make better products. During the third quarter of last year, our customer complaints peaked at 35 complaints per month. Not that high, we were doing an adequate job, but I knew we could improve it. During the first quarter, even amidst higher volumes, our complaints averaged less than 10 per month. We did this by introducing improvements in our delivery system, our trays. We can still do better. We are preparing a number of formulation improvements for EPA review, which will be -- we will be submitting within days. We have a commitment to continuously improving the product. And now to giving the customers more choices. This really started last year with the introduction of the Elevate System, a delivery system that uniquely targets the roof rat or black rat. For those not familiar, the Elevate System we created with its suspended bait station is revolutionary within the pest control market. There simply is no other effective product on the market like it designed for aboveground deployment for the control of roof rats. The industry has typically utilized traditional bait boxes to deliver pesticides and other products, and the design of the system is such that it permits easy drop-in and replacement of new 8-ounce bottles of ContraPest, reducing servicing time and cost. We filed for patent protection for the Elevate System in April in recognition of both its uniqueness and effectiveness. The initial focus for us with Elevate is agriculture. While our experience with agricultural applications demonstrates the efficacy and economic value of ContraPest, our customers have been requesting an additional bating option to target rats where they often live, specifically in rafters and other aboveground locations. I believe the Elevate System will be an innovation that enables us to accelerate our penetration into a number of key markets, particularly agriculture. We also realized that the 400-milliliter standard tank size was not always optimal for initial deployments or modest infestations. Therefore, we have introduced a 4-ounce starter tank. We suggest that this tank be used at the outset of a deployment and then replaced with a 400-milliliter tank when consumption patterns are confirmed. We have added additional products and options to our e-commerce site, such as the 12-month prepaid subscription for e-commerce customers and convenience items. All of our e-commerce as well as commercial activities are being enhanced by CRM campaigns. Investments in this channel continue to show results. Sales growth during the quarter continues to be led by our e-commerce platform, and we believe it will be a big part of our success going forward. I will mention that the recent weather-related issues in California especially have put a damper on Q1 activity for both agriculture and e-commerce. Q2 looks to be recovering nicely. Let me turn now to some of the highlights of the quarter. As part of our expanded selling strategy, we recently signed a national distribution agreement with Target Specialty Products for ContraPest. In addition to distribution, Target Specialty Products and SenesTech will be actively collaborating and marketing and selling ContraPest throughout their extensive network. With this agreement, we have now renewed and expanded agreements with the two largest structural pest management distributors, Veseris and Target Specialty Products, allowing us far greater reach and access into the professional market than we would otherwise be able to afford. Another key commercialization strategy has been the highlighting of ContraPest at a number of industry conferences including Animal Care Expo in New Orleans, New York's Rodent Roundup and the PEAK 2023 Poultry Show. Trade shows provide a unique opportunity to interact directly with the pest management customers and to communicate the benefits of ContraPest directly. Each of the introductions can then be followed by a sales discussion with their pest management providers. The PEAK Poultry trade show, in particular, is the largest industry trade show in the U.S. and proved an ideal venue to showcase the economic and productivity benefits of ContraPest that can provide when added to other integrated pest management tools. I believe the Elevate System will be a key driver for growth in the poultry market with an addressable market size of close to $200 million, particularly as the effects of the recent avian bird flu subside. As further evidence of our top-of-funnel activities, our public relations efforts continued as TIME Magazine featured ContraPest as an innovative approach to dealing with global rat infestations. The article highlighted successful ContraPest programs across the country, resulting in rat population reductions of 90% and also announced the start of a program in the city of Ferndale, Michigan. The story explains the city is moving forward with a program because, ContraPest has the potential to change the way cities around the world address their own rat situations by limiting the rodent's ability to reproduce. We were also highlighted in a Seattle-based article recently where the owner of an eco-based pest control company explained her approach. Her quote, "We avoid using rodenticides and prefer to seal up holes and use physical traps. And one new product that we have tested over the last year is a rat birth control liquid called ContraPest made by SenesTech. In our commercial test site on the top of Queen Anne Hill, we've seen a 91% reduction in the resident rat population over eight months. We're offering this option to the conservation-minded homeowners and businesses, and it has proven to be very effective with no risk of secondary poisoning." This is great PR and helps bring in new customers. But as they say, this is a results business, and we need to produce results. Let's turn to revenue-related milestones. Last month, one of the largest agricultural grain export companies in the world deployed ContraPest to select grain storage for export facilities. As most of you know, rats post a particular challenge in agriculture. Due to the outdoor nature of the business, exclusion practices are not effective or practical. Due to foods and food inputs being produced, poisons can pose a danger as well. In addition to direct grain consumption, rats caused contamination in grains through urine and nesting. They will chew through electrical wires and equipment and structures, causing millions of dollars of damage through the entire supply chain. Even in cases where populations are controllable for a short time, the movement of food products allows opportunity for populations to move during the transport, especially in grain. With this customer and this initial deployment, our experts work with the best management professionals to develop and deploy ContraPest as an addition to the existing integrated pest management program. If this follows the success we have seen in other customer segments, this initial deployment represents significant growth potential. I should also note that we have recently been contacted by an international grain shipment company. They are also interested in discussing how ContraPest could aid in their efforts to combat destructive rat infestations. Also in April, we confirmed County of Los Angeles is continuing and expanding its use of fertility control and current request for proposal. We are also seeing continued adoption in Santa Clara and San Francisco. Geographically, California continues to be a leading adopter of ContraPest following their implementation of the Ecosystems Protection Act of 2021, which bans the use of commonly used second generational anticoagulant poisons under many circumstances. You may recall that, in December, we announced that the City of Los Angeles had ordered and have now deployed ContraPest broadly at the Los Angeles Zoo as part of their integrated Pest Management Program with a deployment plan that is expected to exceed 250 bait stations. Overall, 25 zoos, including three of the top 10 zoos in the United States are now using ContraPest. When we expand this segment to include animal sanctuaries and veterinary clinics, the customer count is much higher, well over 200. Besides being a target market in their own right, zoos and sanctuaries are the ultimate influencers in all things animal, so this continues to be a focus segment for us. On the municipal front, we continue to expand with the latest deployments being West Allis, Wisconsin and Brookline, Massachusetts. As the publicity surrounding the nation's rattiest cities increases and word gets out about successful deployments like Silicon Valley, more municipal and county agencies are looking carefully at fertility control. With a focus on the near term and long term, during the first quarter, we advanced a number of key initiatives, including the approval of ContraPest for general use from New York State Department of Environmental Conservation, removing restricted use pesticide from the label of ContraPest. This was a key event that dramatically expands the market for ContraPest in New York as it no longer requires application by especially licensed pest control companies and eliminates restrictive handling and paperwork. New York now becomes the 49th state to remove the RUP label from ContraPest. Also in March, we confirmed the various news reports that SenesTech has been working with the Danish company, TriptoBIO, on the development of biosynthetic triptolide, one of the active ingredients in ContraPest. There may be a number of very distinct advantages to biosynthetic triptolide, including more consistency in its quality and availability compared with botanically derived triptolide as well as a much lower cost profile than botanical purification, allowing us to lower the price of ContraPest to greatly expand its market domestically and internationally. Beyond those points above, biosynthetic triptolide will also provide a solid foundation for our soft bait product candidate that we have been working on with Liphatech. That project has progressed well, and we have a number of formulation candidates with which to move forward. We recognize the work that is needed to drive consistent and rapid adoption of ContraPest and do not take the opportunity we have in front of us lightly. ContraPest is a game-changing product that fits seamlessly into all integrated pest management programs, greatly improving the overall goal of effective pest management. I'm pleased with the operational progress made during the quarter and believe we will see the benefits of these results in the coming quarters. With that overview, let me turn it over to Tom to review the financials. Tom?

Thank you, Joel. A reminder to our investors, the press release is available on our website in the Investor Relations section. Further, we expect to file our 10-Q today, so I will just touch on some of the high points right now. Revenue during the first quarter was $233,000 compared to $195,000 in Q1 of '22, an increase of 19%. Sales growth during the first quarter was led by growth in the company's e-commerce platform, which made up approximately 45% of Q1 2023 product sales as well as continued traction with zoos and sanctuaries, and pest management professionals. As Joel mentioned, though, weather-related issues put a damper on sales during the quarter, especially in California. Gross profit during the first quarter was approximately $92,000 or 40% of total revenue compared to approximately 90% or 46% of total revenue in Q1 of last year. Excluding costs related to the scrapping of defective inventory no longer used in our products, gross profit margin would have been 58% in Q1 of 2023. Net loss during Q1 2023 was $2 million compared with a net loss of $2.3 million for Q1 of 2022. Adjusted EBITDA loss, which is a non-GAAP measure of operating performance, for Q1 2023 was $1.8 million compared to $2.0 million in Q1 of 2022. Cash at the end of March 2023 was $2.7 million. Subsequent to the end of the quarter in April 2023, the company closed on a registered direct offering priced at the market under NASDAQ rules for gross proceeds of $1.5 million. While this does improve our runway, we will continue to assess the capital markets for further financing. With that, let me turn it back over to Joel for any closing remarks, and we will then take your questions. Joel?

Thanks, Tom. I joined SenesTech due to my passion and commitment to sustainable effective solutions to vector and pest control challenges. ContraPest fits right in with that passion. Beyond that, I joined because I felt I could leverage my 15 years of executive leadership in the vector and pest management industries where help drive large commercial adoption of EPA-registered control products, just like ContraPest. I'm instituting what I believe to be tried and true sales strategies to accomplish the goal that we all desire, which is to accelerate and steepen the adoption curve of a truly revolutionary product. Having now had the opportunity to be entrenched with the team for a few months, my excitement is higher today than when I joined. Thank you all for your continued support. And with that, operator, let me now turn it over for any questions.

[Operator Instructions] Seeing no questions in the queue, I would like to turn the call back over to management for closing remarks. Oh, pardon me, it seems we have [Jonathan Berg], Private Investor. Go ahead with your question.

Yes, I have a couple of questions. Thank you. First off, how far along is TriptoBIO in developing the synthetic triptolide?

Yes. This is Tom. So TriptoBIO is -- has, at this point, developed at the laboratory scale the process necessary. They're moving now to the pilot scale, and as they move to that, we're working with them to assist in the EPA registration batches necessary for the EPA. So they're still a year away but making very good progress.

So when you say a year away, does that mean that to get through the EPA, if they're successful, is one year from now? Is that it?

No, they're a year away from being able to produce at the production level at least.

And when will the EPA pass and finish evaluating the product?

The EPA process, which will start sometime during the year, usually takes about a year or less.

Okay. So next, I guess, Joel was talking about bait stations. And I'm curious, a bait station would generate about how much revenue per month?

I'm not sure what you mean by bait station.

You mean internal revenue per bait station?

Yes. Joel mentioned there are so many bait stations that are just out or resulting. And so when you get a new customer and they put out 100 bait stations, how much revenue would you expect to get per month of that? I understand it's a ramp time. But about how much would you expect in terms of revenue from one bait station or 100 bait stations?

Well, it depends on consumption, right? If they're using it, every month is a refill, is $30 to $40 per refill, depending on what. So you could get 6x to 12x for each bait station every month.

I see, so about $30 a refill? I'm sorry?

Yes. So $30 to $40 per refill and then depending on how many refills you have with the bait station. We typically see that they're doing it every month or every two months.

One refill?

Right.

Per every month to two months. So when we're talking about a bait station being out in the field, we can expect that 20 -- maybe $40 a month would come in. Is that correct?

Per bait station, yes.

Yes. Okay. And the bait station itself costs how much initially? In other words, I show up and I get one from my building here in New York, and I get a, whatever it is, a -- one tank filled. That costs you how much to get out the door?

Yes. So we have like a starter kit that's on our e-commerce site, and that's $79. And that will give you the bait station plus two tanks. I think it is to get you started. The good news is we're also working with some of the other bait station manufacturers to come up with a lower-cost bait station that can be used to attract more of the residential-type customers who are not wanting to spend as much on the initial starter kit.

Okay. So do you make a profit on that $80 starter kit?

We do.

Can you give me an idea of what it cost you to put that together?

Well, our objective here and what we've been trying to do and you can see what Tom was reporting on is that it's -- less those extraordinary items, we were at 57% or 58% gross profit in this quarter. That's certainly our objective, is to stay up in that range.

Got it. Okay. All right. Well, thank you very much for your time and keep going guys. We need to get these rats under control.

I'll just add a plug here, Jonathan. Contrapeststore.com, it's all you need to know to get your own bait stations.

We have plenty of rats vertical here in the city. Heading for brunch. Bye.

Thank you.

Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Thank you, everyone, for attending. It was great to report this quarter, and we're looking forward to reporting again on Q2.