Scientific Industries - Q1 2024

Transcript

Operator (participant)

Good day, and welcome to the Scientific Industries reports first quarter fiscal year 2024 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, you may press Star then one on a touch-tone phone. To withdraw your question, please press Star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Joe Dorame. Please go ahead.

Joe Dorame (Managing Partner)

Thanks, Nick. Good morning, and thank you for joining us today to review Scientific Industries financial results for the first quarter of 2024, ended March 31, 2024. With us today on the call are Helena Santos, Chief Executive Officer, and John Moore, Chairman. After the conclusion of today's prepared remarks, we'll open the call for questions. Before we begin with prepared remarks, I would like to remind everyone, certain statements made by the management team of Scientific Industries during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed under risk factors in documents filed by the company with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2023. Forward-looking statements speak only as of the date the statements were made. The company can give no assurance that such forward-looking statements will prove to be correct. Scientific Industries does not undertake and specifically disclaims any obligation to update any forward-looking statements except as required by law. Now I'd like to turn the call over to Helena Santos, CEO of Scientific Industries. Helena?

Helena Santos (CEO)

Thank you, Joe, and thank you for joining us today. So we entered 2024 having successfully raised the financing and doing our last closing in early January, which this enabled us to complete the development and launch of our new SBI DOTS Multi-Parameter Sensor platform, which, John will talk a little bit more about. We're happy to say that we have begun to ship. This was subsequent to quarter end in April. And just to look ahead or look back, when John and I set about on this strategy to revitalize Scientific Industries, and put it on a path for growth, we recognized that both the Torbal business and the SBI business were important for that growth. So let me just take a moment to talk about the workstation, which is part of the Torbal.

This third piece of hardware completes our line of automated pill counters, which provides to our customers automated pill counting, targeting 88,000 pharmacies across the U.S. What does this do? This puts us in a position where we are well on our way to have more new products and growth businesses, in addition to our existing cash-generating Genie line of products. Regarding our SBI products, I have to say that there is nothing more exciting for a new product than having orders in-house to ship when your new product becomes shippable. The fact that customers were willing to place their order and wait for it to be available to ship is a testament to our product. At the same time, we continue to market and sell our Aquila legacy products. Specifically, I'm talking about the CGQ and our Liquid Injection System.

And as a result, our sales grew by over 40% from the same period last year. Again, related to our legacy products, because we only started shipping our new SBI products subsequent to quarter end. We spent quite a bit of time and effort during Q1 on right-sizing our organization and putting in place operational efficiency measures with the goal of better aligning our expenditures and our people with requirements and the vision. So the result is that we right-sized the organization's headcount. That resulted in having what I believe is a world-class team. While most of the right-sizing steps taken were at the bioprocessing business segment, certain initiatives were also implemented across corporate activities and benchtop lab equipment operations to maximize our cash preservation while we build the rest of our company.

This all began with our company's management and key employees volunteering for reduction in their cash comp, with a view of investing in their and the company's future, which started in April. During the quarter, our company also gained a new board member, Mr. Michael Blechman. Michael brings a tremendous amount of experience and expertise to our company, and we also thank Marcus Frampton for his five years of excellent service to our company. He continues to be a great believer in our vision and a supporter of our company, even if he is not on the, on the board of directors. And lastly, before I turn it over to John Moore, I wanted to report that we continued our work on the Vivid Workstation launch, which is making its debut at a trade show this week.

The Vivid products, as most of you know, are primarily sold by our distributor, Rx Systems. They are starting their trade show season right now, which continues into the fall, and so we expect the Vivid product line to resume its aggressive growth plan late into the year. And so I thank you, and now turn it over to Mr. John Moore.

John Moore (Chairman)

Thank you, Helena. Q1 was a breakthrough quarter for Scientific Bioprocessing. We secured the $7 million in financing that Helena previously alluded to. We successfully field-tested our DOTS Multi-Parameter Sensor prototypes and the DOTS 2.0 software, which includes significant upgrades and important user experience benefits. Our software now allows for subscription plans, which will be an important source of recurring revenue, and it's able to automatically inform users about relevant events in their bioprocessing via the implementation of smart email notifications, which is another step in the direction of data-based decision-making and fulfilling our promise of digitally simplified bioprocessing to our customers. We also had customer growth and sales, and we welcomed new customers. We saw robust reorders, and we achieved a remarkable 42% sales growth, even with the impending mid-quarter two 2024 multi-parameter sensor release and a more efficient sales structure.

Our legacy CGQ products remain in high demand, which enables us to sell our inventory at an average gross margin of around 63%. At the same time, we shipped our first three multi-parameter sensor orders to high-profile clients, and we have a packed schedule in the coming months for customer trials. These first three customers include the world's largest niche producer, with hundreds of plants around the world, and the pharmaceutical company with the world's largest R&D budget and a very prominent strain engineering pioneer. We made cost efficiency moves, so to create a near-term path for profitability, we slashed staffing by 23%, and we implemented a voluntary salary cut program.

72% of our team decided to trade cash for stock options at a $2.50 strike price, which they found enticing even with our stock price trading at a $1.50 at the time of the transaction. We combined this with commercial restructuring that we started executing in the second half of last year, and altogether, these measures are going to save us around $1.5 million over the next 12 months. So we made these strategic investments. We had higher Q1 cash costs that were stemming from the severance, from the financing, and from the DOTS Multi-Parameter Sensor launch. These investments are all going to pay off in spades, with lower operating costs and higher margins in the future quarters. Now, the last thing I want to talk about is our marketing blitz.

Our marketing activities continue to generate traction and to create interest in Scientific Bioprocessing around the world. In Q1, we generated more than 200 new leads, and just to put that in context, we typically get 60 new customers a year. So we have 200 new leads, and we're able to increase the total pipeline value to over $3.5 million, even though the majority of the trade show season, our most important lead-generating channel, was yet to come. That is, as of the end of Q1. Now, we're now hitting more than 40 trade shows in 2024. We've already attended 18, both in Europe and the US, and we're generating these just incredibly top-tier customer leads, much larger basket sizes than we sold historically with just the biomass product.

Thanks to our new SBI chairman, John Nicols, who previously led Codexis, a leading synthetic biology company, our profile is soaring, particularly with his peers in the C-suite, as he shares both the problem that we solve in relevant terms to the decision-makers who have budgets. So one example of this is at SynBioBeta, which is, which took place last week. His keynote speech helped to generate over 100 new customer inquiries. That was on top of the 200 I already mentioned that we generated in the first quarter, and that's setting us up for a really promising Q3 and Q4. SynBioBeta is the marketing event of the synthetic biology market worldwide, with an attendance of over 3,000 CEOs and chief technology officers of our target customers.

And we're really gratified and encouraged by the early customer reaction and validation of our grand strategy to grow SBI beyond just supplying biomass monitoring and to become a full bioreactor-like monitoring and control of cell growth in shake flasks. And the step change in productivity that is going to mean, and step change in cost reduction and success in startup that that's going to represent. So we think we've got exciting times ahead. Senior management, you know, voted with our pocketbooks. We all agreed, you know, all the senior management decided to take a 20%-25% pay cut for these additional stock options that we previously mentioned, making a big bet on SBI's future.

With our largest opportunity pipeline ever, we're poised to add a record number of new customers, and multi-parameter sales will significantly increase our customer base, as well as our hardware and recurring revenue opportunities in the second half of the year. Here is to a game-changing year. Thank you so much for listening to our prepared remarks.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. At any time your question has been addressed, and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.... Seeing no questions from analysts, I would like to turn the call over to Mr. Joe Dorame for his questions.

Joe Dorame (Managing Partner)

Great. Thanks, Nick. To kind of kick things off, I'd like to ask a few questions. On the bioprocessing side, can you provide more color on the customers that bought your MPS sight unseen, as you mentioned in the press release? Why did they choose to go with your product?

Well, in the past, customers had said, you know, biomass is great, but it's kind of a trailing indicator, where dissolved oxygen-based feeding allows for the first time, monitoring and control, you know, in a $100 experiment that normally takes place in a $10,000 experiment. So that was really eye-opening for these researchers. And so, you know, the sale to the pharmaceutical company with the world's largest R&D budget, this is a, you know, they're customers of our biomass monitoring system, but they've—they're expanding their use of our systems in other research labs, and this is a reorder from an existing lab that's using our products. We have multiple leads and, you know, this—we have hundreds of opportunities within this one customer, so we're starting to get traction there.

The second customer was this world's largest yeast manufacturing company, and we're in contact with their, the head of their worldwide lab network, and we expect to get further penetration across their worldwide network. Each factory has their own lab, so this is a really big opportunity for us to expand there. They're also extremely aggressive acquirers, and we've had a number of contacts at SynBioBeta with companies they had recently acquired that were inquiring about our system. So, you know, we still have to do demonstrations with these new labs. They, you know, they have their own questions about how they're going to use it and how they're going to add it to the workflows, but that's extremely exciting. And then, the third customer was a very prominent strain engineering company that, you know...

And we think that as we sell more of these systems, there's going to be an increasing power of sales, where the customers themselves are talking to their colleagues and telling them how remarkable this this breakthrough innovation is. So we're really excited about our penetration of these customers.

That's really helpful. You know, staying on bioprocessing, you know, can you help us understand what you're seeing in customer behavior in the bioprocessing segment, specifically with customer growth year-over-year?

John Moore (Chairman)

Well, you know, we specifically—I think, I think what's, what's really becoming more and more, on the, on the front of mind of these customers is, you know, asking their employees to do a manual sample and get one manual sample, risk contamination of the, of the experiment. You know, they're, they're just missing a lot, you know, from, from, from doing that, and real-time monitoring just makes sense. At the same time, you know, the cost of capital has gone up in the last 24 months, and where customers would have otherwise not thought twice about buying a $1 million Ambr system, now they're trying to say, "Well, how can we get, you know, close or similar results in, in shake flasks?" So it just, it just makes sense.

Anybody who is interested, I'd be happy to send a video of John Nicols' keynote remarks at the SynBioBeta conference, where he basically says, you know, this idea of time is overdue. And so, you know, I think the community is waking up to the fact that, hey, we can do less with more. That's what our managers are telling us to do, and now we have a device that can actually accomplish that.

Joe Dorame (Managing Partner)

That's great. All right. Any commentary across the customer types like pharma or CDMOs, that you're seeing, in your pipeline?

John Moore (Chairman)

Well, I would say overall, what we're seeing is companies that just, it's really just, you know, the sales process is, you know, creating awareness, turning that into interest, you know, creating the desire, and then finally, the action. And so one of the things that's kind of remarkable is, you know, we attended 40 trade shows last year, but all we had was the biomass monitor, and we were talking about the multi-parameter sensor.

But, you know, a lot of people said, you know, "Talk to me when you have that." And so we have all the awareness that we've generated over the last several years of this very aggressive marketing that's now coming to the fore, and, you know, it's not uncommon for us to contact somebody again and then say, "Oh, yeah, you know, I saw when you contacted me, you know, six months ago with the relevant, you know, peer-reviewed article to my research. You know, I wanted... I passed it on to my people, but now we're in the budget cycle where we can put it into our budget.

You know, we're interested in a demo of the new system." So, you know, this is. It's not just like we just snapped our fingers and launched the product and now everybody's interested in it. We've been building this head of pressure for quite some time, and we're excited to now be harvesting that.

Joe Dorame (Managing Partner)

Great. All right, so, you know, last one on bioprocessing. You know, now that things seem to be normalizing more, how do you see the competitive dynamic shifting in bioprocessing?

John Moore (Chairman)

...Well, it's probably strange to a lot of people that know the bioprocessing field, but there's not a lot of innovation, particularly on the tool side. Our customers are incredibly innovative in the fact that they're, you know, constantly looking to do things like make, you know, breakthroughs like biodegradable plastics to eliminate problems like microplastics, you know, impacting, you know, world health issues like fertility rates. There's some really, really big opportunities that our customers are addressing. But, you know, the dominant five bioprocessing tool manufacturers, they're more focused on selling products they already have and then acquiring companies that are innovative. And there just hasn't been a lot of innovation in the space.

So that's sort of consequently why people are really astonished when we say, you know, the cheapest and most common bioreactor in science, we figured out a way to bring monitoring and control. And, you know, we had one customer say to us, "This is at the heart of this entire $4 trillion industry, is being able to affordably monitor and control cell growth, and you guys are delivering that in the shake flask." You know, we're the only people that are doing it. We have substantial, not only economic, but also technological and intellectual property moats, and I think this is gonna be a franchise that our shareholders are gonna benefit for many years to come.

Operator (participant)

Again, if you have a question, please press star, then one. Seeing no further questions, this will conclude our question and answer session, as well as the conference. Thank you for attending today's presentation. You may now disconnect your lines. Have a wonderful day.