Scientific Industries Q2 2024 Earnings Call Transcript

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August 15, 2024

There are 5 speakers on the call.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Joe Durame.

Operator

Please go ahead.

Speaker 1

Thanks, Nick. Good morning and thank you all for joining us today to review Scientific Industries' financial results for the Q2 of 2024 ended June 30, 2024. With us today on the call are Helena Santos, Chief Executive Officer Daniel Donadie, CEO of Scientific Bioprocessing and John Moore, Chairman. After the conclusion of today's prepared remarks, we will 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.

Speaker 1

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 ks 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.

Speaker 1

Helena?

Speaker 2

Thank you, Joe, and thank you to our loyal shareholders who have given us the capital to transform our company, Scientific Industries, into a modern business platform that will hopefully generate shareholder and customer value for years to come. The bench top laboratory business has 2 main product platforms, the Genie Lab products and the Torbald Scales business. The Genie products experienced the collapse of our traditionally strong demand from our Chinese distributors and a continued proliferation of knock off products that sell for half our price. The resilience of the Genie products revenue is a tribute to our terrific distribution across the world and our brand reputation as revenues for these products have returned to their pre COVID levels. Our TorVal pharmacy scale business is being transformed by the success in the marketplace of our growing line of Vivid automated pill counters.

Speaker 2

However, during the 1st 6 months of this year, we did hit a snag because the capital expenditure of our independent pharmacy customers literally stopped due to a change in the billing and reimbursement by the pharmacy management benefit managers. So what does this mean? It meant that starting January 1, 2024 this year, retail pharmacies had to pay accrued fees to these BPMs from the scripts that they sold in the last half of twenty twenty three, plus pay the current fees at the point of sale. The industry called this double whammy 6 month period the pharmacy epilepsy and their cash flow collapsed and naturally as a result so did their investments in capital purchases including automation equipment like our Vivid Pill counters. But fortunately this period is now over.

Speaker 2

We as far as we're concerned it's in the rearview mirror and we have seen a huge inflection in sales this month and we're experiencing rapid growth and market share gains in the beginning of this Q3. This growth is going to be accelerated even faster in the Q4 when we begin shipping our vivid workstation, our newest product, which completes the hardware portion of our product line as it pertains to vivid. The workstation has been previewed at the biggest shows of the year and our distribution partner believes this $13,000 product could match the current unit volume of our lower priced Vivid Light S and the Vivid 1. The addition of the workstation solidly cements our position as the technology and market leader in the automated tail counter market. While our hardware development spend is now ended or close there too, we will aggressively continue to add software features to extend our competitive advantage with accurate and fast pill counting providing tons of features and excellent user interface experience together with the value proposition to grow our subscription revenue.

Speaker 2

One of our initiatives that I am particularly excited about is a scheduled 2025 launch of an AI replacement of our geometric pill recognition system, which we're currently working on. This feature is a key component of our grand strategy to dominate the retail pharmacy automation markets. While we are focused on growing our revenues, as I've discussed, just as important as controlling our costs and optimizing our cash utilization. And as I mentioned last quarter, we've spent quite a bit of time and effort this year. Actually, we actually started at the end of last year, but on rightsizing our organization and putting in place the operational efficiency measures with the goal of better aligning our expenditures with our people, with the requirements and our vision.

Speaker 2

It hasn't been easy, but with the cooperation of our entire organization and this starts with our Board of Directors all the way to our employees. We've made great progress in slowing our cash burn as evidenced by our first half year results. And we will continue to be disciplined to strengthen our company for success. I'm very excited about the last half of our year and our future. And with that, I turn it over to Mr.

Speaker 2

Daniel Donadi to talk about the bioprocessing business segment of our company. Daniel?

Speaker 3

Thank you, Alina, and good morning to everyone on the call. Maybe as a preface, this past Sunday marked our 10th anniversary of the German operations, and I would like to take a moment to thank our team for their dedication and all of you on the call and the webcast and everyone that might not be listening for your continued commitment and support that made this milestone possible and will enable many more milestones in the future. 10 years saw us bring to the market important product to showcase our vision that now led us to the launch of the DOTS platform to get our technologies endorsed in around 100 peer reviewed scientific publications and to already generate more than 400 customers in 30 countries who are not only excited by our vision to deliver cost effective scale up alternatives in the next years, but looking to upgrade once our value proposition meets the experimental needs. So let's dive into the business. While looking at the bioprocessing space during the first half of this year, we see a continuation of the 2023 macro challenges that have been notably impacting our target audience, who are in part carefully managing cash flow, tightening budgets and postponing equipment investments.

Speaker 3

At SBI, we see that impact particularly in Europe, which historically accounted for the majority of our top line performance and to some degree in Asia. However, while the environment is challenged and overall demand across the bioprocessing space hasn't surged from the post COVID normalization yet, we do believe that what we see is a temporary phase in an otherwise resilient, cooperative and highly promising market with tremendous mid- to long term prospect, which is particularly fueled by new drug approvals in the biopharma space, synbio applications outside the classical industries and the rise of machine learning as an important future lever. Also and just as a refresher, the fundamental value proposition underlying our bioprocessing product vision for DOTS is to deliver a cost effective scale up alternative compared to traditional approaches that allows our customers to remain innovative and speed up their time to market at a much lower price point. As such, headwinds in the space can always also turn into tailwinds for our business, whether we recognize the challenges but are carefully optimistic for the second half of this year and into 2025. Looking at our bioprocessing financials, I'm happy to report that overall H1 saw us coming in, in line with our projection.

Speaker 3

Sales compared to last year was up 16%, although slightly softer than expected, but improved gross margins and lower expenditures exceeded the projections and resulted in a significantly improved EBITDA, roughly 20% better than last year. While product demand in Europe was notably weaker than historically usual, we saw a strong growth in top line performance in the U. S. Of 84% compared to the same time frame last year as well as an increase in revenue from our distribution activities, particularly from Latin America. Also, we are ahead of schedule when it comes to our working capital requirements, which gives us some additional room for potential strategic investment in Q3 and Q4 to boost sales.

Speaker 3

All in all, the first half of this year was an important transformative step for our business, not only for the new product introductions and business model adjustments, but also towards our path to profitability in the coming years. As projected, we have continued to systematically restructure the organization and to manage expenditures. While we have made important and necessary strategic investments to not compromise our product roadmap and to intensify our commercial efforts to leverage promising channels, we have executed a company wide cost management efficiency program to rightsize the bioprocessing organization. As a whole, these cost adjustment measures generated net SG and A savings of around 20% in the first half of twenty twenty four, and we expect to see more impact from the program in the second half of this year as Q1 and Q2 saw us investing around USD 270,000 in segments and remaining comp against the 23% reduction in force that would generate cost savings of around $1,000,000 annually as of this year and going forward. Additionally, the overarching majority of our current team participated in a voluntary salary waiver program of up to 25 percent of their salary to receive options at $2.50 a share when the stock price was at $1.50 which nicely highlights our team's belief in the buyer process and vision.

Speaker 3

At the same time, we were able to manifest our robust gross margin slightly above 70% as a result of low discount legacy sales, particularly of our bioreactor sensors Bio R as well as first DOTS platform sales where we see additional room for improvement as we establish our fully fledged value proposition. Taking all of that into account, our bioprocessing business today is already significantly more productive than it was 12 months ago, and we are now focusing on leading the team to increase the output in the next years. I'm mostly happy to say that we delivered and launched the first version of our DOTS platform in line with our original R and D roadmap and started to shift to 1st accounts by the end of April. Even though we are only looking at a limited time frame and refrain from judging the technology adoption just yet, it was remarkable to see selected accounts placing an order with us prior to product availability, which means that they bought sight unseen. The feedback and endorsement we received from these accounts and these early users in particular is very promising and helps us to tailor the technology to our customer needs as we expand the platform to deliver it to a full value.

Speaker 3

And while early accounts share the value of our products with us, we also see first signs of public endorsement. We were particularly delighted to see that in a recent presentation at SINB, one of the headline industry events in our space, Merck went on stage such an early time frame and life cycle of the product. Merck went on stage to share with its peers that our technology is a cost effective alternative for strain engineering and that it closes the gap between plate readers and the Sartorius Amber 250 system, which is an early proof for our value proposition and it sends a lot of contacts to our booth. Likewise, Central Carolina Community College recently published a paper on our technologies saying that they are bridging a gap in workforce education between what skilled students learn in college compared to the ones required by industry. Obviously, all of this is just a start, but a start that could have been worse.

Speaker 3

Because while revenue is the most important performance metric as we mature, it's my fundamental belief that the prospect of the new technology following its launch is best assessed by customer interest and early endorsement. We do not only see that qualitatively, we also see that in the numbers. Ever since the beginning of the year, we recorded a significant increase in our commercial pipeline value that highlights the interest in DOTS, namely a $1,800,000 or 70% increase in total pipeline and a weighted pipeline increase of more than $600,000 or 50%. At the same time, we are ahead of schedule when it comes to the number of leads generated through our marketing activities, which is obviously something where we had invested a bit in with a 75% increase year over year. Again, we know that after years of restructuring our organization and bringing down costs while making necessary investments to position the company for the future, the launch of the first version of DOTS is just the beginning.

Speaker 3

We will need to continue working hard to sell our existing offerings, to sell our vision and to deliver our innovative roadmap and value proposition. But once we get there, every account that we have and every account that we generate is another foot in the door for us and a beachhead to meaningful sales going forward. And one more layer, while we have always seen ourselves as a sensor company, we are aware that there's untapped potential that is delivered with a platform like DOTS. Already today, we generate around 5,000,000 raw data points per cultivation. And knowing that data is an invaluable fuel for artificial intelligence and machine learning models, I do see potential to capture more value from our business model when the time is right.

Speaker 3

And with that, back to Joe, I

Speaker 1

believe. All right, Nick. I think we're ready to take questions. Can you please provide instructions for listeners to queue up?

Speaker 4

Certainly.

Operator

We will now begin the question and answer session. Seeing no further questions, this will conclude our question and answer session. I would like to turn the conference back over to John Moore for any closing remarks.

Speaker 4

Thank you all for attending today's call. Our launch of the SBI DOTS multi parameter sensor platform is a big deal for the synthetic biology industry as it is a simple and practical method of creating high volumes of digitally structured data for powering their AI models and eliminating the traditional but very inefficient trial and error method of designing their experiments. This is important because synthetic biology companies, whether they're high margin drug companies facing pricing pressure or whether they're a chemical company trying to replace traditional chemicals and petroleum based products, they need to lower their costs and improve their margins. So our data is critical to being able to help them do that. I'd like to share one anecdote about our value proposition.

Speaker 4

1 of our customers bought $50,000 of our biomass sensors. They use the devices in their research, in their process development and in their manufacturing. They later shared with us that our devices delivered key insights that enabled them to improve their product yield by 120x and that resulted in a $120,000,000 improvement in the licensing value they were able to realize from their drug. We have the challenge of not only convincing our target customers the value of our DOTS platform so they'll purchase our systems, but also we need to create new business models to make certain we're capturing a fair portion of our value proposition as possible. We're excited by this challenge and this concludes our call today.

Speaker 4

Thank you so much for joining us.

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Earnings Conference Call
Scientific Industries Q2 2024
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