SenesTech, Inc. (SNES) Q1 2024 Earnings Report, Transcript and Summary

Good day, and welcome to the SenesTech, Inc. Reports First Quarter Fiscal Year 2024 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.

All right. Thank you very much, Chad, and thank you to everyone for joining us on today's call. As the operator indicated for SenesTech's First Quarter 2024 financial results for the period ended March 31, 2024. With us on the call today are Mr. Joel Fruendt, 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. [Operator Instructions] Before we begin with prepared remarks, we submit for the record the following statement. The management team of SenesTech during the course oof 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 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 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 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 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 Joel Fruendt, Chief Executive Officer; for SenesTech. Joel, please proceed.

Thank you, Robert. Good afternoon, everyone. Thank you for joining us today for our Q1 conference call. I certainly couldn't be more pleased to be speaking with you today given all the positive developments going on with the company. So let me jump right into it. During the first quarter, we reported record revenue of $415,000, an increase of 78% compared to the first quarter of last year. This was also a 41% increase sequentially from the fourth quarter of 2023. Key driver has been the introduction of Evolve, our all-new soft bait product launched in January of this year, which has quickly become the company's biggest selling product, contributing more than 50% of first quarter revenue. As a reminder, Evolve is an EPA designated minimum risk product and brings 3 key benefits to the marketplace: one, a shelf life of 1 year plus so it is an excellent rodent control product for distribution. Two, it is delivered in a soft bait form factor, so it is familiar and easy to use in the field and three, it is economical and is offered at a competitive price to traditional rodenticides. I will come back to this more in a moment. One point to make regarding the revenues. This outstanding growth reflected regulatory approval of Evolve in only 30 states. There are several states, including high potential states such as Florida, that required an efficacy study before approval. That efficacy study is now complete, which bodes well for acceptance by the remaining states and further accelerated growth in Q2. Speaking of the efficacy study, we finished up our study at the University of Arizona last month and the results were positive as expected and predicted from the literature available on the active ingredient and from our experience with ContraPest. The study results confirmed a 61% reduction in litter size through only one breeding cycle. This indicates an 85% reduction in population over 6 months compared to leaving the population untreated and 90% plus after 1 year. We will now start some longer-term field trials at customer locations, and we fully expect the efficacy to increase significantly over multiple litters with increased consumption and with real-world conditions. This is actually a little better than our first short-term study with ContraPest, which then went on to prove out over 90% efficacy in longer-term field studies. We expect Evolve will prove to be the product of choice for rodent population control. With this published report, we now have the data requested by certain state and international regulators increasing the conversion potential for the rest of this year. Another key highlight was our introduction of Evolve mouse this month. This soft bait product utilizes the same revolutionary breakthrough fertility solution anti valve only to control mouse infestations, effectively doubling our addressable market opportunity. One of our lead distributors and online retailers, DIY pest control has already committed to a sizable preorder and will immediately add evolve mouse to their website offerings. Product shipments began last week and we expect Evolve Mouse to be a key driver to growth throughout the rest of the year. This effectively doubles our addressable market opportunity. It has been estimated that U.S. rodent pest management product sales, over half of which target mouse infestations, are more than $1 billion annually and are growing. At the same time, regulators in California and other areas are putting more restrictions on the application of common use poisons, leading consumers and pest managers to seek new methods for control and ease of purchase options, providing us with an enhanced opportunity going forward. Evolve has proven to be a very versatile product that is perfect for many distribution channels that focus on our target markets. To keep focus on each of these areas, we have developed our sixth channel strategy for distribution, Our 6 channels are e-commerce, international, agribusiness, pest management, industrial and retail. We have strategies designed for each channel, and I will briefly comment on progress in each channel. In the e-commerce space, we have expanded the offerings on our own site significantly. We are also proud to announce the launch of a dedicated Amazon store, which we have launched this week. This was really made possible by the introduction of Evolve and by the expansion of our packaging from the initial 6-pound and 12-pound pail sizes that are so popular with the professional market to now include 1.5 pound and 3-pound pouches that are more convenient for the consumer market as well as being more earth-friendly with their packaging. The international channel has seen substantial interest and activity. Since Evolve's launch, we have signed 6 key international exclusive distribution agreements from Hong Kong to Australia to the UAE. Each of the agreements requires an initial order of a full pallet minimum to around $10,000 and the annual sales minimum started $100,000 for exclusive distribution rights and grow over time. In our agribusiness channel, we announced a new agreement with Wilco distributing, who placed a multi pallet stocking order, addressing some very lucrative open field agriculture opportunities. This followed agreements with Poppe Enterprises for the grain management area and Agricom for the egg production and protein production facilities management. In the pest management channel, we have signed agreements and have initial stocking orders from [indiscernible] in their 77 locations and DIY pest control to satisfy demand from their significant pest control customer base. Our commitment by our field staff to the pest management market, pest control operators and government agencies is creating a pull-through effect where local availability in distributors' warehouses is a key factor in driving revenue growth. We have identified a significant opportunity in the industrial channel and are finalizing agreements for an industrial rep agency with 28 outside sales reps to assist us in giving Evolve stock at substantial industrial distributors, such as Grainger and Fastenal. This will be our channel to reach the facilities management and food safety markets as well. We expect this agreement to be completed soon. And as we talked about during our year-end call, we are excited about the opportunities in the retail channel. Since we received approval as a vendor for a national hardware retailer, which consists of over 4,500 locations, we have now completed the process of getting set up in their system with our Evolve products. We have also signed on to attend their August market days to display our products for purchase by location managers and owners. To enhance our presence and fully address that network and other similar retailers, we have signed a rep agency with over 30 field reps to represent us with these major national and regional retailers in home supply, hardware and ag retail locations. This will be a key sales driver for us in 2024. Using distribution channels to leverage and extend our sales reach is a key initiative for the year, and we are off to a great start. You can expect further news in the coming months as we further penetrate the retail and warehouse club networks. Finally, and as I assume most of you saw in the news, the New York City Council introduced a proposal for deployment of EPA-approved birth control to address rodent infestations. The NASDAQ is the only manufacturer of commercially available EPA registered rat birth control, which we believe bodes well for our opportunity. While New York City is not at all the urban market for us, it is a highly visible one and one that we will pursue after trying home remedies, dry ice, drowning buckets and other improvement tools, it is good to see that the city is finally looking at tested and proven techniques. To wrap, I firmly believe the tide has shifted for SenesTech. We have the right product solutions to address one of the world's most challenging problems, rodent control, through a completely different way than has ever been done before by addressing the root cause of the problem, reproduction and how to proactively control that reproduction. Our product lines, ContraPest and Evolve, address the fundamental issue of rodent overpopulation by proactively controlling the population rather than trying to keep up with the growing numbers of an infestation with poisons or traps alone. Remember, 2 rats can turn into 15,000 in 1 year alone. You just can't kill them fast enough. In fact, during this call, there will be tens of thousand rats for us the globe. Pest management professionals and homeowners are seeking alternatives to poisons as poisons are highly regulated and are tricky to use less poisons are less than 40% effective. Clearly, the development evolve is a game changer for them. and for us as well. To give you more detail on that and on the financials, let me turn the call over to Tom. Tom?

Thank you, Joel. A reminder to our investors, the press release is available on our website in the Investor Relations section, as will be a recording of this presentation. Further, we expect to file our 10-Q later today, so I will just touch on some of the high points right now. Revenue during the first quarter was $415,000, an increase of 78% compared to $233,000 in Q1 of 2023. As Joel mentioned, the key driver was Evolve, which represented more than 50% of our first quarter sales. Looking at it by our distribution verticals, we saw a significant increase in sales and pest management professionals as well as commercial customers. I mentioned this last quarter, but I'll remind everyone again that due to the success of Evolve, we have had to expand our manufacturing capabilities. Today, we have the capacity for about 1,000 pounds per day, soon to be 2,000 pounds with a clear path to 4,000 pounds per day. More than enough to keep up with the current demand. To this point, EVOLVE is offered in 6 and 12-pound pails, which are optimal for the professional market. and 1.5 pound and 3-pound pouches for the consumer market, which we began shipping in March. To allow for the increase of raw materials and finished goods, we have expanded our warehouse space in Phoenix. Cost of sales in the first quarter of 2024 was impacted by the higher cost of a key ingredient in our new Evolve product due to a supply chain issue. We corrected this issue as quickly as possible, but we were forced to use higher cost ingredients in the first months of production. We finished that transition at the end of the first quarter. To give you an example of the impact if we had used the intended raw materials during the first quarter, which we are now, our gross profit would have been 52%. And as immediate confirmation, our preliminary gross margin in April was 58%. Going forward, we now have a reliable supply chain process, which will ensure that this does not recur. Ultimately, whereas ContraPest brings in a gross margin of about 50% Evolve has the potential to earn 60% or more. Operating expenses for the quarter were $2 million, a decrease of 8% compared to the $2.1 million in the comparable period of 2023. We made numerous changes in our operating structure. The company remains committed to driving operational efficiencies with a goal of removing another $1 million out of annual operating expenses in 2024. Net loss during the quarter was $1.8 million compared to a net loss of $2 million in Q1 of 2023, an improvement of $200,000. Adjusted EBITDA loss, which is a non-GAAP measure of operating performance for Q1 of 2024 was $1.7 million compared to $1.8 million in Q1 of 2023. The quarterly adjusted EBITDA loss was the smallest in company history as we strive to achieve our goal of achieving positive operating cash flow. Cash at the end of the quarter was $3.6 million. We have approximately 3.1 million shorter-term warrants still outstanding after last financing, and we are optimistic that as we continue to execute our business plan that the remaining warrants will be a source of cash over the coming quarters. With that, Chad, please let me turn it over to you for questions.

[Operator Instructions]

Chad, this is Robert. I'll go ahead and jump in while we see if anyone comes in on the dial in and ask some questions through the website. [Operator Instructions] Joel and Tom, we have a question here in terms of your sales outlook for the mouse product, what should we expect in the coming quarter?

So as with our first product, there are certain states which accept the EPA minimum risk designation right away and other states, which will have additional questions or requirements. This may go more quickly than our first product. But we should assume that Evolve mouse will gain state approval gradually, and we'll build up to a good portion of our evolved sales probably in the 15% to 25% range over the course of the year.

Okay. Great. [Operator Instructions] It looks like we have one more question here. Do you expect the Amazon store to cannibalize sales from your own website? Or do you think it's a different customer?

We have some great customers on our site, and I'm sure they will continue to purchase there. Amazon is a powerful channel. And there may well be many customers that prefer it but there are also many customers out there that prefer to deal directly with the company. So in any case, whether they want to buy on our site or buy in Amazon or pricing strategy is somewhat neutral. So we just believe that the power of the Amazon channel is going to really come on strong.

All right. Fantastic. It looks like we have another question here. What will it take to get a distribution agreement with the major pest control companies?

So we're in contact with the major pest control companies, and we do have some of their locations that are using it. So we think that as we get further along here with Evolve and it's proven out in the field that the pest control companies, along with the distribution companies that service the pest control major companies are going to be willing to take a look at some type of supply agreement going forward. We're really confident in that.

Okay. Great. Looks like we don't have any further questions here. So Joel, I'll go ahead and turn it over to you for any closing comments.

Thanks, Robert. Thank you all for your attention here today. This is shaping up to be an outstanding year for SenesTech. and I look forward to sharing our success with you in the coming months. Thank you.

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