Q3 2024 SenesTech Inc Earnings Call

Speaker Change: Good day and welcome to the Semestec third quarter fiscal year 2024 financial results conference call.

Speaker Change: All participants will be in a listen-only mode for the duration of the call. Should you need any assistance today, please signal a conference specialist by pressing the star key followed by zero.

Speaker Change: After today's presentation there will be an opportunity to ask questions. To ask a question you may press star 1 on your telephone keypad and to withdraw a question please press star then 2. Also please be aware that today's call is being recorded.

Speaker Change: I would now like to turn the call over to Robert Blum of Litham Partners. Please go ahead.

Robert Blum: All right, thank you very much and thank you all for joining us today to discuss Synestec's third quarter 2024 financial results.

for the period ended September 30th, 2024.

Robert Blum: With us on the call today are Joel Fruendt, the company's Chief Executive Officer, and Tom Chesterman, the company's Chief Financial Officer.

Robert Blum: At the conclusion of today's prepared remarks, we will open the call for a question and answer session.

Speaker Change: If you dialed into the call through the traditional teleconference line, as the operator indicated, please press star then 1 to ask a question.

Speaker Change: If you are listening through the webcast portal and would like to ask a question, you can submit your question through the Ask a Question feature in the webcast player, and we'll do our best to get to as many questions as possible. Before we begin with prepared remarks, we submit for the record the following statements.

Speaker Change: Statements made by the management team of SNESTEC 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.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: including the risk 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 Security and Exchange Commission.

Speaker Change: All forward-looking statements contained during this conference call speak only of the date in which they were made and are based on management's assumptions and estimates as of such date.

Speaker Change: 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. Joel, please proceed.

Joel Fruendt: Thank you, Robert, and good afternoon, everyone. Thank you all for joining us today for our Q3 conference call.

So let's jump right into it.

Joel Fruendt: As you saw in the press release, I am certainly pleased with all the progress made during the third quarter.

Joel Fruendt: which culminated in yet another record quarterly revenue number as Evolve continues to be a game-changer.

for Synestec as well as for the industry.

Joel Fruendt: Beyond the record revenues, we are also maintaining a keen focus on efficient operational execution.

Joel Fruendt: During Q3, gross margins were 65% compared to 49% in last year's Q3, and up from 54% in Q2.

Joel Fruendt: From an OPEX standpoint, operating expenses were down 12% year-over-year despite the continued revenue growth as we became more efficient in our selling processes.

Joel Fruendt: The net result was our best quarterly adjusted EBITDA performance in company history, a 21% improvement from the year ago third quarter.

Joel Fruendt: Taking a step back, it's important to recognize that we only launched the Evolve RAT product less than a year ago. During that time it has gone from zero in revenue to account for 52% of our business.

Joel Fruendt: We are just in the early innings of what we believe Evolve RAT will become.

Joel Fruendt: For those of you that are somewhat new to the story, a reminder that Evolve is our all-new softbait product that has similar efficacy to our legacy product ContraPest.

Joel Fruendt: But in a format that is more familiar and easier to deploy, and is offered at a competitive price to traditional rodenticides.

Joel Fruendt: It is designated as a minimum risk product by the EPA, pursuant to Regulation 25B, and consists of food and food additive ingredients.

Joel Fruendt: Evolve has dramatically increased our reach in terms of markets and geographies and the results are clear that Evolve is what retailers and distributors have been looking for from Synestec.

Joel Fruendt: Beyond evolved rats continued growth and adoption, another key driver to our go-forward growth is our introduction of a mouse product which we announced in May of this year.

Joel Fruendt: In that short period of time, it has accounted for 17% of Q3 revenue as we build on the success of the RAD product.

Joel Fruendt: This off-bait product utilizes the same revolutionary breakthrough fertility solution as Evolve RAT, but with a specific formulation to target mouse infestations, effectively doubling our addressable market opportunity.

Joel Fruendt: With these two products leading the way, we have several initiatives in place to drive growth.

Joel Fruendt: Let's dive into these one by one. First, let's talk about our expansion with key online retailers.

Joel Fruendt: As most of you know, we launched our Amazon store a few months ago.

Joel Fruendt: This has progressed well, and Amazon represented 43% of our total e-commerce business in the third quarter.

Joel Fruendt: We also launched the product on DIYPestControl.com during Q2 2024, and sales are increasing there at a rapid pace.

Joel Fruendt: Over the weekend, the company went live on walmart.com. We launched the site and started to receive orders in a short period of time.

Joel Fruendt: We also are in the final testing with TractorSupply.com, with the products expected to be available for purchase in the coming weeks.

Joel Fruendt: Overall, sales on e-commerce related platforms, including synestech.com, continued to trend upwards.

Joel Fruendt: with sales increasing approximately 20% in Q3 2024 compared to Q3 2023 and representing approximately 35% of total year-to-date 2024 sales.

Next, let's discuss brick-and-mortar

Joel Fruendt: As some of you may remember, during our Q2 call in August, I conducted a call live from the floor of the Ace Hardware Fall Buying Market, where we exhibited the Evolve product line for the first time to over 7,700 participants, representing over 5,000 stores.

Joel Fruendt: as well as over 400 buyers from Ace's Wholesale Business who sell to over 700 non-Ace stores.

Joel Fruendt: I'm pleased to say we have increased the adoption of Evolve within this first key national home improvement retailer.

Joel Fruendt: The next step with ACE will be to have them begin stocking our products in their warehouses, rather than having each store order from us directly, and to have our products represented on ACE.com, which can only happen if they are stocking our products in their warehouses.

Joel Fruendt: We are also working with five manufacturers rep agencies with more than 50 outside representatives targeting retail hardware chains to inventory evolve in their stores.

We estimate that this realistically represents over 20,000 locations.

Joel Fruendt: With even a modest assumption of penetration, this represents a multi-million dollar opportunity.

Joel Fruendt: In fact, one of our rep agencies has us set up for the Mid-States Distributing Winter Buying Exhibition and the Orgel Hardware Distribution Buying Exhibition in February.

Joel Fruendt: This will be our first time exhibiting at these buying shows and we are excited about the exposure we will receive.

Joel Fruendt: As I mentioned last quarter, each of these buyers have their own specific processes and buying patterns. Ace, for example, agreed to put us in their purchasing system, but it's a complex process that takes months. Fosco, on the other hand, plans everything six months in advance or more, so we are pitching for next year sales.

Joel Fruendt: Walmart is yet different. They tend to start with some of their stores, stock them with a couple of cases of product, and then expand based on demand. Every customer is different, which is why it is so important to work with manufacturers rep agencies who know these buying patterns.

Joel Fruendt: Next, let's transition to municipal programs, namely New York City. Recently, the New York City Council has approved a bill to implement a rat contraception pilot program.

Joel Fruendt: From the bill, the term rat contraceptive means an agent for the reduction of reproductive capacity in rats that is available for sale and approved for such use by the EPA.

Joel Fruendt: Nestec is currently the only manufacturer of products that meet this requirement.

Joel Fruendt: Responding to requests from the city, we have prepared and presented an initial supply proposal.

Joel Fruendt: We look forward to being able to communicate more with you about our progress in the weeks and months to come.

Joel Fruendt: Earlier this year we had put out several announcements related to partnerships in various global locations.

Joel Fruendt: As we stated in these releases, there is an in-country registration process that is required to begin selling Evolve in each of these countries.

Joel Fruendt: With our respective partners, we have been working hard to move these forward, and we are making progress.

Joel Fruendt: We just received a multi-pallet stocking order for immediate shipment from our distributor in the Netherlands.

This is the largest order in the company's history.

Speaker Change: Evalve recently received full registration in Hong Kong and we are close to receiving a container-sized stocking order from our exclusive distributor in Hong Kong.

Speaker Change: To put some perspectives aside, we estimate a pallet is about a $10,000 order, while a container contains 10 pallets.

Speaker Change: And we are getting close to registration in Australia and New Zealand after many months of submissions and trials.

Speaker Change: And we also are in the final stages of selecting exclusive distributors in India, Pakistan, Chile, Brazil, and Taiwan.

Speaker Change: So, when we look at the coming quarters, our global push should be a significant driver to future growth.

Speaker Change: As you can hear, we are moving the ball forward quickly on our multi-channel commercialization strategy.

beyond commercially focused efforts

Speaker Change: We are also advancing other key efforts that will be beneficial to Synestec.

Speaker Change: As we talked about last quarter, we have enhanced our packaging at Vau, having launched new convenient 1.5 lb, 3 lb, and 6 lb pouches, which use 87% less plastic than traditional pails.

Speaker Change: This past packaging also provides for enhanced gross margins, which you saw in today's results.

Speaker Change: And we are focused on bringing new products to market, and should have more to report on that in subsequent quarters.

Speaker Change: We also have many studies underway to showcase evolved success in real-world settings.

Speaker Change: Right now, we have trials underway with an East Coast agricultural firm highlighting Evolv in a sugar cane operation.

Speaker Change: We also have a leading pest management professional deploying Evolve in a housing area on a West Coast University campus.

Speaker Change: and a Western University is completing a laboratory efficacy trial for evolved mouse.

Speaker Change: Finally, on the regulatory front, Evolv RAD is now available for sale in 47 states, while Evolv Mouse is up to 35 states.

Speaker Change: The remaining states are waiting for various administrative steps, which should be completed soon.

Speaker Change: So as you can hear, there is a lot going on. As the only manufacturer of US EPA registered and accepted products for the reduction of reproductive capacity in rodents, we have a tremendous opportunity ahead of us to change the game.

Speaker Change: how the pest control industry, municipalities, agriculture, and consumers address the problem of rodent infestation.

Speaker Change: We look forward to continuing rapid adoption of our innovative solutions.

Speaker Change: Let me now turn it over to Tom Chesterman to review the financials in more detail. Tom?

Tom Chesterman: Thank you, Joel. We will be filing our 10-Q later today, but let me hit some financial highlights. Revenues for the first nine months of 2024 were $1.4 million compared to $898,000 for the same period in 2023.

Speaker Change: This growth was driven by the evolved wrap and evolved mouth product lines.

Speaker Change: Bontrafest and related products represented the remaining 31% of revenue for the quarter.

Speaker Change: Looking at revenue by channels, e-commerce sales, which included our own website, Amazon and DIYPestControl.com, represented 35% of revenue during the third quarter.

Distributor revenue was 39%, while field sales represented 25%.

Speaker Change: brick-and-mortar retail, which really just started for us, was about 2% of our sales, and we had nominal sales internationally in the quarter. But as Joel indicated, we are anticipating international orders will provide added growth in the coming months, and in fact we just received our first multi-pallet order from an international distributor.

Speaker Change: As we've said in the past, our evolved product line represents a lower cost and higher margin opportunity for Cinesteq, and this is proving out.

Ever-improving manufacturing operations give us both pricing and margin flexibility.

Speaker Change: Gross margin this quarter was a record, a new record of 65%, up from 49% for the same period last year.

Speaker Change: From a dollar standpoint, gross profit dollars increased 79% in Q3 2024 compared to Q3 of last year.

Speaker Change: As I mentioned last quarter, we are also increasing production capacity to meet future demand. We have secured a newer, larger facility in the Phoenix area that will allow us to meet the next five years of increasing demand without dramatically increasing our facility costs.

Speaker Change: We expect to move to this location during the first half of next year.

Speaker Change: We continue to hold the line on OPEX as well. In fact, with growing revenues, solid gross profit, and disciplined operating expenses, we have cut our cash burn significantly.

Speaker Change: Our adjusted EBITDA, or how we measure cash burn, historically was more than 1 million dollars a month.

Speaker Change: For the first nine months of the year, our adjusted EBITDA is just about $500,000 a month.

Speaker Change: With these trends, adding in the near-term potential Joel mentioned, we definitely see the potential for cash flow break-even next year.

Speaker Change: Looking at the balance sheet in August, we announced the closing of an exercise of certain existing warrants to purchase 505,000 shares of the company's common stock at a price of $4.60 per share.

In addition, the company issued new warrants.

Speaker Change: The aggregate gross proceeds from the exercise of these existing warrants were approximately $2.3 million before deducting placement agent fees and other offering expenses payable by the company.

Speaker Change: We have also put in place an ATM, or at-the-market equity facility.

Speaker Change: This allows us to sell small amounts of stock over time.

directly to the market, opportunistically.

Speaker Change: This is a lower cost way of raising capital and one that does not involve warrants.

Speaker Change: We have started using this ATM recently, taking care not to disrupt the market.

We've also begun and already begun using DATMAR.

Speaker Change: Most of our manufacturing capacity investment has been through debt, as will be detailed in our 10-Q.

Speaker Change: We're also pursuing credit facilities that will provide a committed source of capital to bridge to our goal of cash flow breakeven next year.

Speaker Change: Similar to Joel's comments, I am pleased with the progress made during the third quarter and year to date. Record revenues, record gross margins, decreased OPEX, our lowest EBITDA loss in history,

Speaker Change: and a pathway for growth and profitability. The game has truly changed for us.

Operator, let's open the lines for questions.

We will now begin the question and answer session.

Speaker Change: To ask a question, you may press star then 1 on your telephone keypad.

Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, you may press star and two. At this time, we will pause just momentarily to assemble a roster.

And again.

Speaker Change: Yeah, Tom, let me jump in here for just a moment here. I do have one question from the webcast to both Joel and Tom. Can you talk about the timing as it relates to when you think you might hear from New York City?

Joel Fruendt: Yes, Joel, it should be soon. We've been going back and forth on a few things and it will certainly be within the next month.

Speaker Change: Okay, fantastic. Operator, that's all the questions I have here. I'll go ahead and turn it over for closing instructions.

Thank you. Thank you.

Speaker Change: All right this will also conclude our question and answer session on the phone side. I'd like to turn the conference back over to management for closing remarks.

Speaker Change: Thank you for watching. I hope to see you again soon.

Speaker Change: Yes, thank you all for being on the call today. We always look forward to sharing the information and the progress of the company and we look forward to

The End

Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.