Q4 2019 Earnings Call

Thank you very much, Gary. And thank all of you for joining us today is we discussed enough text fiscal year 2019 Financial results for the period ended December 31st, June 2019 with us on the call today are Mister Ken Siegel the company's chief executive officer. Mr.tom Chesterman. The company's Chief Financial Officer at the conclusion of today's remarks. We will open the call for a question-and-answer session before we begin with prepare arcs. We submit for the record the following statement the statements made by the management team of faith during the course of this conference call may contain forward-looking statements within the meaning of section 27A of the Securities Act of 1933 the amended and section 21e with the Securities Exchange Act of 1934 is amended in such forward-looking statements are made pursuant to the safe harbor provisions of the private Securities litigation Reform Act of 1995 chef.

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Patients 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 listen to their caution 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 the forward-looking statements including the risks that actual results May differ materially from those projected in the forward-looking statements the results of various factors and other groups identified in our filings with wage has changed commission all forward-looking statements contained during this conference calls only have the date in which they were made are based on Management's assumptions and estimates as of such date. He's not undertake any obligation to publicly update any forward-looking statements, whether the results of the receipt of new information a current of future events or otherwise with that said Thursday.

And the call over to Ken Siegel 10, please proceed.

Thanks, Robert. Good afternoon everybody and thank you for joining the call in some trying times as you saw from our earnings release at a high level. We essentially met your expectations for the quarter and that included our third consecutive quarter of sequential Revenue growth albeit on a small base and we successfully move forward on a number of the initiatives. We've been discussing since I came on board last May which included the need to re-evaluate our sales and marketing strategy in order to drive successful long-term adoption of contract passed in the marketplace.

That point as I've said in past calls we needed 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 needed to have experienced base models for the value and efficacy of Contra past for Pest Management professionals and their customers.

During the quarter we made progress and all these important points while simultaneously advancing additional strategies including the launch of our brand new direct-to-consumer e-commerce volition, which were 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 nine 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 and moving forward while then asked Tom to write some color on the financials and the other initiatives were working on.

The need to prove the economic value of Contra past has been a key learning for us and is driving many of our current initiatives. As you know, the initial cost to deploy Contra past is more than the cost of conventional roadmap consequently TPMS and in some cases and users have experienced sticker shock when deciding whether to buy and use the product at the same time. We both the TPMS think the Contra past is a sterilant and once deployed eliminates the need for future Services. We believe this is a key factor in the unwillingness of some of them to buy and use Contra past month as well as a factor in the overpricing being exhibited by those who do essentially some he's May fear using contrabass because it works does damaging their business model.

To address this we needed to do several things first. We need to clearly demonstrate the law.

term usage requirements of Contra past 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 controversial works in the real world. Our plan is to complete several studies of a year to at least provide the necessary data sets.

We're currently six months in the 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 today most critically we need to demonstrate the time when the use of contrabass ships from after deployment to maintenance. Although this will be this will vary based on the risk of migration from other locations. What's called the edge of fact, we believe that stabilization and that's maintenance will begin in approximately nine to twelve months at that point the amount of contributions required and the related maintenance will drop significantly importantly though. Is that the need for Contra past won't go away entirely.

And enlightened PMP will realize that the most effective at the economic model for them will be to treat Contra past essentially as a subscription product one that requires continued application a servicing for long-term efficacy. This should in turn generate increasing profits to them as their product and service costs declined as the maintenance requirement begins with most importantly emps need to understand that using Contra past will not kill their business by simply making rodents go away. In fact, they need to keep using Chrome Cast to keep rodents from coming back.

Similarly, we need to be able to demonstrate to end-users that the initial cost of Contra past is Justified not only by its safety and efficacy, but by its ultimate enhancement to their bottom line.

The actual date and need it 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 edit option, we are focusing on how the use of Contra past dramatically reduces grain laws 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 a matter of a few ounces of lost grain or other foodstuffs once damaged by a rat the entire product or package needs to be disposed at

Losses for the average retail location are often in the thousands of dollars per month against which the cost of Contra past isn't even a rounding error finally came in useful 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.

the same time

We have data scientist combing through all of our historic data sets to mind 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 Contra past represents a next-generation approach to managing rat populations through fertility control. It's entering into an industry are plagued by the Reliance on lethal rodenticides and with a history of failure to achieve a sustained reduction in Rat populations. We firmly believe that Contra past can become a brand leader role in the global rat control Market as we position the field day two successes for customer acceptance.

An additional learning for me is that Contra past is currently limited by EPA requirements to endure use and to outdoor use within one foot of man-made structures in order to broaden the ability that 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 Supplies are 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 page. In addition. We've begun work on new formulations of the product particularly solid and semi-solid bearings. Although these are not essential to our near-term plans month. We believe that non liquid formulations will significantly expand the potential uses of Contra past 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 will be able to give us access to proven Technologies 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 dtcp program goes Live this week and reflects one of our most ambitious projects today. The purpose of the new program is too full first month. We learned over the past year that a significant portion of the residential and small-business Market is unable to have contrabass deployed at their locations due to the unavailability of licensed Pest Management professionals to provide deployment and services. These people have been reaching out to us to provide a solution this week. We will launch a starter kit as well as the series of simple to follow videos providing instruction on how to effectively use Contra best. We will also be launching a monthly subscription service that will send a new supply of contrabass to automatically for a discount from the regular retail price.

second

Contrabass through adding a substantial markup to both the product and the related service. They do this despite the service protocol for Contra past being essentially the same as other products deployed bait 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 pnp's and thus hath I 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 contrast.

So that is a background. Where do we stand?

In Washington, DC our deployments continue to show a high level of product consumption as well as an over 70% reduction in the ratio of juveniles two adults.

This reduction is the key to demonstrating that birth control is working. We're now working to create visual proof of the actual reduction of rat activity in the alleys that we are targeting. It should have that assembled the next few weeks while an absolute reduction is always a challenge to prove in an area that has a high in migration risk reduction in juvenile has this 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 the next few months. Excuse me. I'm in San Francisco. We've completed a highly successful initial deployment in a park and a second deployment is underway.

Key in San Francisco is getting proof of efficacy and safety to the manager of green purchasing an 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 off the end of the third quarter.

Ultra tests continued in California

We are 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 will we will be 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 wage 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.

A retail study is expanded to additional locations. When issue we have had though has been interference with our bait stations by PMP servicing. Those stores are working with the customers resolve this issue as well as identifying other locations that we can directly service without the presence of an incumbent campy.

We've learned that a number of PMP is that deployed?

A 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 took girls to maintenance.

Finally, I renewed our Outreach to Major pmt's to see how we break through their reluctance to deploy this next Generation technology.

My expectation is that the valuation work? We will doing will be critical debates and discussions. So they are time to commence as the data comes in.

So what's next?

as I mentioned before public health issues are now an 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 said before much of the local Focus has been on the nuisance of rats rather than their potential as significant carrier in 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 long 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 US, we're in active negotiations with a major Chinese company to distribute Contra past and 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 money factoring the product.

As part of the deal were launching a major demonstration of contrast as part of an IPM program in Hong Kong.

Initial Target will be a hundred eighty thousand square foot multi-storey Market in the city and will provide us an opportunity for a high-profile showcase and ultimate success.

We're working through the requirements to bring contract us to Hong Kong, but we're hopeful to start this project in the next month.

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 and buying a rational Pest Solutions. Like Contra best. 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 wage loss this icky understanding of what it will take to drive Market acceptance of Contra past. Steve is already hit the ground running and is driving progress across multiple fronts final all eyes are on direct-to-consumer as I mentioned this site launches this week for the major digital and social media Splash and we're very excited about this month 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 than 24,000 Thursday 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 143000 vs. 297000 in fiscal year two week 2018. This decrease year-over-year is due primarily off to a large scale 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 six months talking order turned out to be more than a 12 months Supply.

Turning out of the bottom line on a gaap basis net loss for fiscal year 2019 was $10 compared with a net loss of 11 11 million 11.9 a purchase through your 2018. This reduction of loss was driven by 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 eight point two million dollars vs 8.0 million in fiscal year 2018 fiscal year 2018 results include about three hundred thousand dollars of unusual and non-recurring legal and litigation expenses. I would view this trend as neutral to a perhaps a little down. This does not make any sense of shifts. We have made to our cost structure though throughout the year. We have been shifting resources from the pure science of the past two more focus on commercialisation towards the end of the year. We suspended our goal of transition to include optimization.

Specifically we added a goal of reducing our burn rate by a million dollars per year.

Steps to support this have included a reduction in headcount the departure of our two co-founders doctor's Loretta mayor and tire carriers cast Severance costs, but we'll 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 headcount expense in the coming quarters with the 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 improved travel cost in time and allows us more immediate access to our customers are manufacturing and back-office functions remain in Flagstaff.

we've also

We'll find 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 beating 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 couple announced the closing of two separate registered direct stock offerings. Totally one point seven million dollars in net proceeds. These were opportunistic shelf takedowns cash at the end of 2019 together with the net proceeds from those offerings was three point six million dollars.

And our previous burn rate of approximately eight million dollars per annum that would imply about a six-month cash Runway from the end of last year. They'll hopefully our burn rate reduction efforts mentioned above will extend that recognizing that additional financing is likely needed. We also filed the next one recent we will be amending this for the fiscal year financials this allows flexibility when 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 with a 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.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the key to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

The first question is from Ian Gilson with Zacks investment research, please go ahead.

Good afternoon. Could you expand basically on the San Francisco Giants how many sites that are currently?

and and

We are adding one side. I believe you written here. What is the potential site number if San Francisco decides to go to a full coverage?

So it can right now we are in two sides in San Francisco. One is a park one is a restaurant type complex.

Essentially, we need those two in order to demonstrate to the manager a safety and effectiveness of the product. Once that's cleared. We're on the approval for all locations in San Francisco. So it's essentially this is rather than you know, simply a matter of of incrementality off. 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.

That they staged rollout of June. That's more likely.

Well, essentially what it is is we get on the approved list.

And then they are they are capable of buying it from us. You know, we don't expect it will be a massive, you know influx immediately. It will take some time as they become aware of the availability but it really is is a step change in terms of what it is. We can do within the suit.

Okay, you're going to have to mark it to each individual point of placement.

Similar to what we've been doing essentially we would continue with our you know, our our marketing campaign, you know together with you know, email and social media marketing dead, but this will end up on a list that every locality, you know in you know in part to me every building every building building manager the park officials et cetera will have access to so they'll know immediately about the availability of Contra past. It'll be up to us to use our own marketing to make sure they start buying it.

Okay, when you talk about a high consumption in in Los Angeles in general public consumption mean there are more rights in talking.

Or the fact that there is a pathway that the rats used in in that particular instance you more than other parts of ways which may be in using other areas.

You know, it's a combination of factors, you know, very high the consumption we're doing on a base station by base station basis. So we would be putting gas stations into the 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 they're dead.

So we talking.

About consumption we're talking about the amount that's being consumed by each base station, which we believe is then indicative indicative of the fact that a broad segment of the population within that text area that test area is actually consuming the product and then because we know consumption directly correlates, excuse me with reduced fertility. We inspect the next phase after we see the high consumption you see a drop in juveniles across the board.

Okay.

The other items that you've spoken about in the past including the arch at the and that area where they doing.

The the initial part 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. You know, one of the things that we are working on with them is the continued deployment model because we're concerned that even though they have essentially eliminated the population there. If they don't continue to have a contrabass deployed 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 the product for right now, the rats are gong in the initial location and they're declining in the one that with recent appointment.

Blacks are gone.

would the

prior to the user of the site decide they no longer need to be to use bait stations.

Okay, that's what they said education.

And this is where we need to educate them. Okay. This is where the Pest Management professional there who happens to be, you know, you know a good customer of ours.

I believe that they can stop deployment. We know, you know, particularly given the fact that this isn't a municipality you have Edge effect issues and that in order to avoid the rest coming back they are going to need to deploy. So that's conversations were having with them. Now. The other thing is we still need our own projects to be completed in terms of 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 Contra past. You can continue to maintain the level of zero.

Okay, great. Thank you very much.

You're welcome.

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. You know, I realize it's it's a very interesting time for everyone, you know in some respects, you know as much trouble as the situation may be globally. This is actually an interesting opportunity for the company.

In some ways. I wish I would didn't have the ability to say that but frankly.

You know, the the whole issue of disease transmission is a critical element of 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.

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