Scientific Industries, Inc. (SCND) Earnings Call Transcript & Summary

Good day, and welcome to the Scientific Industries First Quarter 2023 Financial Results Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Joe Dorame from Lytham Partners. Please go ahead.

Thanks, Jason. Good morning, and thank you for joining us today to review the financial results of Scientific Industries for the first quarter of 2023 ended March 31, 2023. With us today on the call are Helena Santos, Chief Executive Officer; Daniel Grünes, CEO of Scientific Bioprocessing; and John Moore, Chairman. [Operator Instructions]. 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 and 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, 2022. 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 whether as a result of new information, future events or otherwise. Now I'd like to turn the call over to Helena Santos, CEO of Scientific Industries. Helena?

Thank you, Joe, and thank you, and welcome to Scientific Industries Q1 conference call. Today's comments will be brief, since our year-end earnings call was just about a month ago. So in the last call, we shared the price we paid for SBI or Scientific Bioprocessing Inc. in our Torbal division and the quick paybacks we realized from those investments. We also shared how we have reinvested those funds mostly in Scientific Bioprocessing and to a lesser extent in the Torbal VIVID automated pill counters, this to create a further growth in shareholder value. The benchtop Laboratory business is a combination of the Genie product line as well as the Torbal scale and VIVID automated pill counting products. While most life science tool businesses that benefited from helping battle the COVID epidemic, such as Scientific Industries, they are suffering today, but our benchtop business reported an 8% increase in sales, and this is because of the 50% increase in the Torbal product revenue. I'm also excited that we have launched the first paid subscription service for VIVID, this in our 70-year history. We are anticipating a very high level of our installed and growing customer base to sign up for the subscription, which we expect between 350 in the first year, all the way up to 2,500 in 5 years. And just to remind you, every VIVID pill counter is sold with a fully paid up one-year license, so customers can experience the benefits of automation. We will add new paid subscribers on a rolling 12-month basis from the time of a customer purchase. Then there's U.S. federal track and trace regulations on prescription drugs, and this is supposed to come into effect this November of 2023. And we expect this to substantially accelerate the adoption of VIVID systems and pill counters. So when we were seeking to transform Scientific Industries, from a small, profitable, but slow-growing business into a much larger, much faster-growing business that could more richly reward our shareholders, we didn't have to look much further for inspiration in the Sartorius ambr system and the revolutionary centers we licensed over the years to them. We have, at good authority, that ambr, which is a miniaturized parallelized bioreactor system, is the most profitable products sold by Sartorius and this is a $23 billion market capitalization company. There have been over $1 billion in ambr systems sold to date. One company, Ginkgo Bioworks, has 196 systems at an average sales price of $1 million. That is remarkable investment for a startup. We have committed ourselves to expanding on our original technology and improving the form factors to widely expand the applications. The creative genius of the 4 Aquila Biolab founders have exceeded our expectations in this regard. And so I would now like to turn the call over to Daniel Greunes, the CEO of Scientific Bioprocessing and its predecessor, Aquila Biolabs, so he can speak further about what we're doing at Bioprocessing and all the excitement. Daniel?

Thank you, Helena, and good morning, everyone, from over here in Germany. The popularity and commercial success of technologies like the ambr system are driven by the evolution of synthetic biology and the breathtaking possibilities it brings about. In synthetic biology, we don't only just observe processes in living organisms, we redesigned them in a way that they do what we expect them to do. As such, genetically engineered organisms already allow us to create sustainable biofuels and bioplastics, alternative proteins or artificial meat and could help us cure rare and untreatable diseases or clean our polluted waters and air. If you look back a few thousand years, you realize that biology has taken us from gathering seeds, to engineering DNA and that engineering has taken us from rocks and caves to handheld computers and self-driving cars. We've come a long way already, but the true value lies ahead of us. And in the convergence of these 2 disciplines or as Steve Jobs put it, the biggest innovations of the 21st century will be at the intersection of biology and technology. However, the technology in which the conversion happens, the bioreactor, has not yet lived up to the expectation. High throughput automated bioreactive systems like the ambr are obviously very powerful screening and development tools that help us understand, predict and use biological systems, but they come at a [ thicker ] price of up to $1 million as Helena already mentioned in CapEx and per [ experiment ] cost of around $2,000. Hence, the vast majority of the market cannot afford these systems. On top of that, they only provide insights into selected process steps, while others remain unaccessible black boxes. As a result of which, a recent BCG study concluded that 90% of all sim bioprocesses still fail today. Our SBI DOTS platform for digitally simplified bioprocessing will change that by bringing bioreactor-like capabilities to the most ubiquitous and commonly used reaction vessel in the world, the Shake Flasks. During the last earnings call, I've given you an update on the introduction of the first component of DOTS, our DOTS software which enabled us to migrate all our legacy products to a single platform to launch a new line of fiber optic PH and DO sensors and to unlock close-loop control in Shake Flasks. During the first quarter of 2023, we have been working to further develop the DOTS software based on market feedback from our growing customer base. And we have realized and released a new version, a new software version, which includes new feature sets regarding data visualization, handling of experiment groups and advanced data export options and have implemented paid customer requests to customize thoughts to specific production environment. At the same time, we have worked on our second DOTS component, the market parameter reader. We currently work -- we are currently a working prototype of the new reader in our laboratories and expect to get them into the hands of early access customers for our pilot phase that we will kick off in summer. However, the biggest progress from our R&D team was achieved regarding the remaining component of the DOTS platform, our [ chemo ] sensing pills. For the past year's successful proof of concept and ID IP protection phase, we have now transitioned our new pill concept towards the product development phase with our Q1 activities centering around technical evaluation, optimization and first steps towards production and QC planning. Hence, we are well on track for our targeted Q4 hot launch of the new multi parameter reader together with our sensing pills. The first generation of the pills in combination with the new multiparameter reader as well as our legacy products, the combination of which we are already extensively testing in internal studies, will not only showcase our vision to the market, but already today allows us to run small production processes in Shake Flasks that so far could only be done in a bioreactor. And we're not only doing it at a completely new level of simplicity and visibility, but also at a fraction of the cost and a fraction of the time, and that's what we want to share with our customers in the market. We are extremely excited by the launch of the new tech, because we see an increasingly huge appetite from potential and existing customers for the feature sets that we will deliver. And because we have a very clear and deliberate product road map for the foreseeable future, whereby we will be able to add new sensors to the platform every 6 to 12 months and where we will be able to create tremendous value for our customers. Before I finish my portion, I would like to briefly comment on the commercial side of the business. As you may recall, we have adjusted our go-to-market strategy towards the end of last year. We have set up a dedicated distribution management and have focused our sales team towards a more specialized profile to strengthen our approach to sell from scientist-to-scientist. It certainly will take a bit of time for those effects and the effects of such adjustments to show. And while our early stage pipelines are a leading indicator of strategic adjustments, sales successes are usually trading to be reflected in the results. However, I'm already very, very happy on both fronts. Compared to last year, we have doubled the value of our early-stage pipeline with twice as many leads and opportunities in the last couple of months. Customers like Bond Pet Foods or Clarion, so industrial customers, are quantifying the return on investment from the use of our tech and sharing their success stories with us in the market. And Q1 saw the biggest order in our history as a company with the leading contract manufacturing company equipping a manufacturing site with our tech to monitor their production batches, a company in part, where we have a lot more potential for additional sales. Of course, all of these are just stepping stones on our path to success. And I can assure you, we will work very hard and diligently to capture the current potential as well as to set up an organization to change bioprocessing with our new products in the future. But already, and while the bioprocessing business saw the absence of royalties, due to patent exploration, Q1 product sales of $223,000 plus the backlog going into the second quarter indicates the 76% growth in customer orders compared to the same quarter last year, whereby I remain optimistic that we will achieve our 2023 annual targets. And with that, I'd like to hand it back to you, Helena.

Thank you, Daniel. At this point, Joe, would you like to make some comments? Joe Dorame?

We'll ask for questions.

[Operator Instructions]. Our first question comes from Paul Knight from KeyBanc.

Daniel, what will be the difference from the multisensor -- multiparameter DOTS versus the DOTS that came out in January?

Okay. So thanks, Paul. So essentially, the DOTS platform has 3 components, right? It has a software for data analytics. It has the reader tech and it has the chemo sensing pills. What we launched last year was the DOTS software. And now we are working on the next-gen of the reader and sensing tech. So the difference is essentially in what kind of components are we talking about. Towards the end of the year, what we will be launching is the reader, a new multiparameter reader and the sensing pills. We will start with the first generation of sensing pills, which we'll see dissolves oxygen, one of the most common parameters that is -- that bioprocesses are controlled by. And we will launch the multiparameter reader, which will not only see biomass in the -- as a sensing capability as the physical measurement, but it will have multi-spectrum biomass. It will have fluorescence. So it allows us to differentiate between product and producer. It will have -- it will allow us to do the spectroscopy, and it will have environmental sensing such as pressure, humidity, temperature, acceleration, speed. And we can also via soft sensors that we calculate all the big data, display combination parameters such as viscosity or turbidity for example. So we will just enlarge the sensing universe of that reader. And it will be the hardware that in the future we'll be able to read out all the different sensing pills that we are continuously bringing to the market in that road map of every 6 to 12 months a new parameter that we will add to the sensing pill platform. And we will start with DO, then we'll likely launch PH throughout 2024. And then we'll focus on the next parameter, which will be glucose.

Got it. Okay. And then Helena, could you talk to this Shake to the VIVID product, the regulations coming, what, from FDA regarding exactly what?

Yes. So there's this regulation that is coming into a fact on, like I said, on November? November. And at all pills throughout the entire supply chain needs to be traced and tracked. And we have the ability within our algorithm to do that. And so this is just something that not the competition is able to do. So it puts us in the forefront.

What is the VIVID's market share, Helena?

Well, right now, we are -- right now, we are only in the independent pharmacy markets. And out of that, we would probably have since the rest of the of the market is also being addressed by 2 major competitors, one of which is in the forefront. But we probably have -- I would -- we're not looking at the numbers, but we probably have a good 50% to 70% of that market today. So we still have -- and that's just of independents -- and independents only make up about 40,000 of a total of about 98,000 pharmacies between the U.S. and the Canadian market. So we feel that, where the real opportunity lies for us will be, when we go after the non-independent, after the change. And that will be when we have our workstation ready.

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

Well, thank you all for attending the earnings call. We're very excited by the progress and the potential of creating outsized shareholder value by increasing the profit margins, the sales growth and the quality of earnings from recurring revenue related to both the Torbal, Vivid product in the near future from recurring revenue related to single-use sensors and software subscriptions related to Scientific Bioprocessing. Those rerecurring revenues will start in the first quarter of 2024, when we start shipping the DOTS multiparameter sensors. So thank you all so much for your time, and we're looking forward to speaking with you all in the future. Thank you.

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