Q4 2023 Senestech Inc Earnings Call

Participants

Joel Fruendt; CEO; Senestech Inc

Tom Chesterman; CFO; Senestech Inc

Robert Blum; Moderator; Lytham Partners LLC

Amit Dayal; Analyst; H.C. Wainwright & Co LLC

Presentation

Operator

Good afternoon and welcome to the SenesTech Reports Fourth Quarter and Fiscal Year 2023 financial results conference call.
All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question, please press star then one on your telephone keypad. To withdraw from the question queue, please press star one to Please note this event is being recorded. I would now like to turn the call over to Robert Blum with Lytham Partners. Please go ahead.

Robert Blum

All right. Thank you very much, Anthony, and good afternoon, everyone. Thank you for joining us.
Today, as Anthony mentioned to discuss Nastech's 2023 financial results for the period ended December 31 2023. With us on the call today are Jim Ferland, the Company's Chief Executive Officer and Tom Chesterman, so Nastech's Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question and answer session.
Before I begin, with prepared remarks, we submit for the record the following statements. Statements made by the management team of MasTec 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 the Company's filings with the Securities 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 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 Jim Ferland, Chief Executive Officer. So MasTec.

Joel Fruendt

Joel, please proceed.
Good afternoon, everyone. Thank you all for joining us today for our year end conference call. During 2023, we executed several key initiatives that will be the foundation to drive growth for us. And as tech into the future, most notable was the development of EVOLVE, our all new South Bay fertility control product that was launched at the end of 2023. As a reminder, Evolve has similar efficacy to ContraPest. However, Evolve has three distinct benefits and uses a one-year shelf life that allows for extensive distribution opportunities comes in a solid form that is more familiar to technicians and consumers and easier to deploy, and it's offered it at a competitive price to traditional rodenticides. This has dramatically increased our reach in terms of markets and geographies. It is evident from the initial response that evolved is what retailers and distributors have been looking for from Sinopec. One major proof point is our recent approval as a vendor for a leading network of hardware stores network comprising over 45,000 locations. Just the first few weeks after evolves introductions, they have become the first of many major retailers that will carry our products to target the do-it-yourselfer and broader consumer market. We expect more to come on board in the months to come to penetrate the market retail market quickly. We are in final negotiations with the manufacturers rep firm that specializes in retail relationships to represent us with these major national and regional retailers in hardware and home supply, industrial supply and agricultural supply.
Another major advancement has been the agreement with a global leader in irrigation solutions for sustainable open field agriculture, pulp and field agriculture presents unique challenges to rodent and pest control. Poisons can be broadcast trapping is expensive and have limited efficacy evolve. South Bay with its minimum risk at reasonable cost and its proven efficacy provides a new tool for this widespread market. Our partner has selected one of their preferred customers for the initial deployment of dairy and almond producer in California. Their stated goal is to ultimately expand their offering of evolve to their customers across the globe as they learn more about a vast potential. Agriculture is a huge underserved market. We have another potential customer in sugarcane production. They have over $10 million in annual losses to rat activity, destroying sections of their fields and choose not to use poisons in their field. They will start working with the ball broadcasting and throughout their fields, reducing the population significantly and thus cutting down those economic losses.
Also in the agricultural space. We entered into an agreement with Poppy enterprises, a distributor and pest management firm focused on the grain management market, serving the upper Midwest grain storage operations have unique challenges when it comes to road and pest control. Again, poisons are highly regulated and are tricky to use without contamination and traps alone are expensive and time-consuming to maintain nonpartisan evolve. South Bay provides new tools for this widespread market in combination with some traps list, Fabrice and effective non-employees, an IPM program and other key proof point on how REVOLVE expands our market opportunity is the rapid number of new international distributors we have brought on board over the past few months for geographies outside the US, including Hong Kong, Macau, UAE, Singapore, Australia, New Zealand, and the Netherlands. Importantly, these agreements typically include initial orders and annual minimums for geographic exclusivity, protect our first pallet shipments have just arrived in Hong Kong and Singapore.
That question I know, a lot of investors have been asking us what will all of this mean for sales and reducing our burn rate. What I can report is that in 2024 as of mid-February, total revenues for Synetics that's grown more than 80% compared to the same period in 2023. This is being driven by orders for evolve, which represented more than 50% of year to date 2024 total revenue and includes international revenue for the first time in the Company's history is increasingly clear that evolve is a game changing product person aspect that will be a key driver of our sales growth in 2024.
Transitioning the conversation have been we have laid out a few key imperatives to drive growth. One was to offer the customers more choices, which you Bob clearly does not wish to sell better. In some cases, this means improve the infrastructure we have in other instances, it means bringing in as experts in areas where we need additional skills, manufacturers' rep agency. I mentioned as an example, in another example, we are exploring ways to increase our e-commerce capabilities and reach for that. And we are in discussions to expand our e-commerce offerings with an industry leading online distributor of pest control products in the agreement expected soon.
We want to be proactive in addressing this channel and believe that partnering with a dedicated online retailer will be an efficient way to boost revenue going forward due to the early success of evolve for Red fertility control is becoming clear that there is a need to develop a product for fertility control mice. We see this as a substantial opportunity that is equal in market size to the RET market. Our product development team has been hard at work and is currently enhancing the form factor and dosing of the unique sulfate contraceptive for mice and have indicated that a product should be ready to market by mid 2024. We brought evolved for routes to market in less than a year now to follow that up with a unique miles product required a major shift in strategy, a sense of urgency and improved utilization of resources. We have been up to the challenge. Again, I look forward to sharing more with you on our upcoming calls.
Looking back at 2023, where we have made some great progress in several areas, which I believe set the stage for future growth, namely our product development process and the launch of evolve. We also made significant improvements to many of the processes and procedures to drive efficiency across the organization to give you more detail on that and on the financials, let me turn the call over to Tom.
Tom?

Tom Chesterman

Thank you, Joe. As 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 have just filed our 10-K, so I'm just going to touch on some of the high points right now. Revenue during the year was $1.2 million, an increase of 17% compared to the $1 million in 2022 for the quarter, revenue was $295,000 compared to $297,000 in the year-ago fourth quarter. During the quarter, we saw a pullback in our e-commerce sales. To some extent this was caused by customer distraction with the of all soft launch limited to key customers. As Joel mentioned, this needs to be an area of focus, and we can use the expertise of an industry-leading online distributor of pest control products to and outsource our e-commerce capabilities.
Gross profit during 2023 was approximately $539,000 or 45% of total revenue compared to approximately $464,000 or 45% of total revenue last year. For the fourth quarter gross profit was $129,000 or 44% of total revenue compared to $116,000 or 39% of total revenue in the year ago, fourth quarter, the gross profit margin and excluded the impact from new product introductions and what was 100 -- was 49%. That's an increase of 10 points over the year.
One important note I want to put out there is that due to the success of eVOLV, we have had to expand our manufacturing capabilities as a point of reference, we were initially manufacturing about GBP200 per day of evolve.
Today.
We are at about GBP1,000 per day and plan to double again in the coming months to meet demand. And that's with a single shift to this point evolve is offered in six and 12 down pails. However, we are launching a new GBP3 pouch for the consumer market, which we plan to begin shipping in March to account for the initial source of raw materials and finished goods. We have expanded our warehouse space in Phoenix this may result in a dip in margins in the near term, but we would expect to ramp as capacity becomes more optimized ultimately where whereas contract has brings in gross margin of about 50% evolve has the potential to earn 60% one more. Operating expenses for the year were $8.2 million, a decrease of nearly $2 million compared to the $10 million in 2022. We made numerous changes in our operating structure, bringing OpEx for the year down from $10 million in 2022 and this resulted in a $1.6 million improvement for the year in our adjusted EBITDA, the Company remains committed to driving operational efficiencies with the goal of removing another million dollars out of annual operating expenses.
Net loss during 2023 was $7.7 million compared to a net loss of $9.7 million in 2022, an improvement of $2 million. Adjusted EBITDA loss, which is a non-GAAP measure of operating performance for 2023 was $6.9 million compared to $8.5 million in 2022, an improvement of one $1.5 million. As I mentioned, quarterly adjusted EBITDA loss was the smallest in company history as we strive to achieve our goal of achieving positive operating cash flow as soon as possible in the coming quarters.
Cash at the end of December 2023 was $5.4 million. We improved the balance sheet through a $5 million public offering of common stock and warrants in November of 2023, of which we saw $1 million of in warrants exercised so far, 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, operator, let me now turn it over for any questions.

Question and Answer Session

Operator

Anthony, we will now begin the question and answer session. To ask question. You may press star then one on your telephone keypad. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we'll pause momentarily. To assemble our roster.
Our first question comes from Amit Dayal with H.C. Wainwright. You may now go ahead.

Amit Dayal

Thank you, guys.
Congratulations on all the progress you've made this year on with respect to, you know, sort of growth expectations for 2024. I know you've commented 80% year-over-year growth so far in 2024 compared to 2023 could this potentially accelerate with the consumer offering on just any color on how we should think about in a modeling for 2024 with all these distribution agreements now in place and move on this new, I guess the consumer market, we will also allow coming into play for you.

Joel Fruendt

Yes, great question, and I can expand on that. This is Joe on the one of the one of the key things with our product is that we have to get the state on registration state approvals. Right now. We have 30 states that we can sell. And in the United States, we expect to have all 50 sometime in the second quarter, hopefully by the end of the second quarter for sure. So we started out that and we're not able to sell everywhere. So that's one factor. Certainly, the consumer market and the retail space is a huge opportunity. That market is estimated at $250 million to $300 million for rodenticide products. And so just being able to step into that marketplace is very significant in itself. So you can see that with those two things lining up and with our international expansion, getting six exclusive distributors in the span of really 60 days here, it leads us to believe there are a lot of others that will follow behind over the next six months. So you combine all those three things together. And yes, there's a major upside with the fact that we now have a product that can be going through distribution on a significant level. And so we have distributors that we're working with domestically and certainly those internationally. So we have the product we have we know its efficacy and we have a lot of expertise that's out there now with the product. So we're really excited about the upside potential.

Amit Dayal

Thank you for that, Joe. On some on the margins front, Tom commented about expecting a little bit of a dip in the near term as you sort of on, you know, expand your presence in the market, but by the end of the fourth quarter, do you expect to be higher than on 2023 or similar levels?

Joel Fruendt

Well, we certainly expect it to be higher as Tom had mentioned that the margins for evolve, our are probably 1,000 basis points higher than than what they are for contract past the and we can if we can ramp it and get it up there and some of the startup costs we've had big a bad by the fourth quarter. We expect to see on margins that are closer to 60% than to the [50%].

Amit Dayal

Understood. Just one last one from me, guys. On your comments about the e-commerce side of the distribution. Did I hear this correctly that you are so outsourcing it to your distributor, if you could just clarify, you know how you are setting up the e-commerce effort going forward?

Joel Fruendt

Yes. So basically, what we're doing is we're outsourcing some of the the and the assistance that we need to really make it expand using some of their resources that they have that we just don't have in house right now. So they approached us with a <unk> a proposal and how we could do the e-commerce better. And we think that we can double our e-commerce business, but we got to have the right resources behind it. And we think that they can provide the right resources so that we can we can grow the business on the e-commerce side as well.

Amit Dayal

But this doesn't mean timing exclusively to this entity, right. I mean, the suggestion service provider fee raise more than yesterday, others sort of.

Joel Fruendt

Yeah.

Amit Dayal

Exclusivity. Okay. Understood.
Absolutely right.
Thank you. That's all I mean, I appreciate it. Thanks so much.

Joel Fruendt

Thank you.

Operator

Again, if you have a question, please press star than one.
Anthony.

Robert Blum

This is Robert Bloom here. I've got a few questions. While we wait to see if there are additional people that are interested in queuing up here that I'd like to make sure get addressed on.
First question here. A bit of flow of distribution agreements coming in, several of which have had annual minimums. But can we get some clarity on the size of these orders? Are the required minimums in sort of the tens of thousands of dollars hundreds of thousands, any sort of average contract size or minimums that you could provide would be greatly appreciated.

Joel Fruendt

Yes. So each of those agreements that we have there we represent in different territories, different potentials on, but typically for us to get involved in an exclusive arrangements is we want the they have a local source of product available sooner rather than later. And so our initial orders require a one pilot minimum order, which is about $10,000 roughly. And then we have annual minimums that we set up as well and those started $100,000. So really what we're doing is we're wanting to put distributors in place that we feel really strong about the product and about the market and are willing to bring the product in. So we're looking to do that in a number of different situations and really help them grow over time.

Robert Blum

All right. Perfect. Next question here. It seems that several of these new contracts are contingent on regulatory approval. Has some Nasdaq experienced any hurdles getting evolve approved in any countries? If so, what is the plan to overcome those hurdles.

Joel Fruendt

But not really no. I think the initial distribution that we've signed up of the distributors themselves are very familiar with the regulatory process in their countries and are confident that they can move that that forward. So the key is being able to partner with distributors who know how to navigate the regulation and dumb. They take the lead. We work with them on getting the approvals. And if there are a few countries out there that we've just put on the back burner because they have some really some onerous regulatory processes. And initially we targeted the markets that we feel very comfortable getting the product approved and subsequently being used.

Robert Blum

Alright, great. on Next question we have here does Sinopec have the manufacturing capacity today to fill these orders?
If now, what does the manufacturing time line over the next few quarters Look like?

Joel Fruendt

Not much to go, I'm.

Tom Chesterman

Sure. Yes, yes, we have the capacity. We were confident that the demand would be there for evolve and would grow quickly. So we design our processes to be very easily scalable. So we don't have we don't have any worries there.

Robert Blum

Okay.
Great.
On two more questions here. Us domestic raised a few million dollars through warrants recently and sort of as you hope to enter this rapid growth phase this year? And next, does the company plan to raise capital by continuing to issue stock warrants? Or will there start adding debt to the balance sheet.

Tom Chesterman

Yeah. Maybe I'll take that one to maybe a bit early for cash flow-based debt, but we're already using asset based financing for our production equipment requirements. In addition to financing, we recently did have $5 million for the short term warrants, which have to be exercised in about a year or they expire. We have found that the short term warrants are an excellent source of cash without having to do other deals.

Robert Blum

Okay, great. And final question here. Has any competition with evolve involving the active ingredients into the markets? Anything you can discuss on that topic?

Joel Fruendt

No, we haven't seen anything. Any companies any other products enter the market, um, we have a patent pending on evolve. Contrapest is issued patents around it. So we don't believe that there will be a competition in the near term for sure.

Robert Blum

All right, fantastic. That's all the questions we have here on this side on Anthony Operator, I'll turn it back over to you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Joel Fruendt

Sure. Thank you. Our goal for 2024 is really all about sales execution while remaining innovative through the introduction of new and innovative products to the market, such as the mouse product. We've talked about my excitement is as high as it has been since I joined the company, I believe we have the right mix of product offerings and team member enthusiasm to fully attack the large and growing road control market market that is desperately in need of innovation and fertility control is that innovation. And so Nasdaq is clearly leading the way. So we thank you for all your continued support.

Operator

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