Q1 2024 Scientific Industries Inc Earnings Call

Participants

Joe Dorame; Investor Relations; Lytham Partners, LLC

Helena Santos; President, Chief Executive Officer, Director; Scientific Industries Inc

John Moore; Chairman of the Board, Chairman of SBI; Scientific Industries Inc

Presentation

Operator

Good day and welcome to the Scientific Industries reports first-quarter fiscal year 2024 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. Please go ahead.

Joe Dorame

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 holding a Santos Chief Executive Officer, and John more, Chairman. (Event 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 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, and 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

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 multiparameter sensor platform, which John will talk a little bit more about. We're happy to say that we begun -- 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 to -- on the strategy to revitalize Scientific Industries and put it on a path for growth, we recognize 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 US. 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.
And regarding our SBI products, I have to say that there is nothing more exciting for a new product than having orders and have 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 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 rightsizing 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 rightsized 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 the 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 supporter of our company, even if he is not 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 tradeshow this week. The VIVID products, as most of you know, are primarily sold by our distributor, Rx Systems. They are starting their tradeshow 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 I'll turn it over to Mr. John Moore.

John Moore

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 is able to automatically inform users about relevant events in their bioprocessing via the implementation of smart e-mail 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 welcome new customers. We saw robust reorders and we achieved a remarkable 42% sales growth, even with the impending mid-quarter-two 2024 multiparameter sensor release and a more efficient sales structure.
Our legacy CGQ products remain in high demand, which enabled us to sell our inventory at an average gross margin of around 63%. At the same time, we shipped our first three multiparameter 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 yeast 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 to profitability, we slashed staffing by 23% and we implemented a voluntary salary cut program. And 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 $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 stemmed from severance from, the financing, and from the DOTS multi-parameter center 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'd like to talk about is our marketing blitz. Our marketing activities continued to generate traction and decrease 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 sell about 60 -- 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 tradeshow season, our most important lead-generating channel, was yet to come. That is as of the end of Q1. We're now hitting more than 40 trade shows in 2024. We've already attended 18, both in Europe and the US, and we are generating leads, just incredibly top-tier customer leads, much larger basket sizes than we sold historically with just the biomass products.
And 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 will resolve in relevant terms to the decision makers who have budgets. The one example of this is at SynBioBeta, 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 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 flask. And the step change in productivity that 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 voted with their pocketbooks. We all agreed -- all the senior management decided to take a 20% to 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 out 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 too a game changing year. Thank you so much for listening to our prepared remarks.

Question and Answer Session

Operator

(Operator Instructions) Seeing no questions from analysts, I would like to turn the call over to Mr. Joe Dorame for his questions.

Joe Dorame

Hey. Thanks, Nick. To 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?

John Moore

Well, in the past, customers had said biomass is great, but it's kind of a trailing indicator where dissolved oxygen-based speeding allows for the first time monitoring and control in $100 experiment that normally takes place in a $10,000 experiment. So that was really eye-opening for these researchers. And so the sales or the pharmaceutical company with the world's largest R&D budget, this is a -- they're customers of our biomass monitoring system, but 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 lean and 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 it's 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 systems. So we still have to do demonstrations of these new labs. 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 -- and we think that as we sell more of the systems, there is going to be an increasing power of sales where the customers themselves, they're talking to their colleagues and telling them how remarkable this breakthrough innovation is. So we're really excited about our penetration in these customers.

Joe Dorame

That's really helpful. Staying on bioprocessing, 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

Well, we've specifically -- I think what's really becoming more and more on the front of mind of these customers is asking their employees to do a manual sample and get one manual sample risk contamination of the experiment. They're just missing a lot from doing that and real-time monitoring just makes sense.
The same time, the cost of capital has gone up in the last 24 months and where customers would have otherwise not thought twice about buying $1 million [amber] system. Now they're trying to say, well, how can we get close or similar results in shake flask? So it just makes sense.
And anybody who is interested, I'd be happy to send a video of John Nichols keynote remarks at the SynBioBeta conference where he basically says, this idea's time is overdue and so 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

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

John Moore

I would say overall, what we're seeing is companies that just -- it's really just the sales processes, creating awareness, turning that into interest, creating the desire, and then finally, the action. And so one of the things that's kind of remarkable is we attended 40 trade shows last year, but all we had was the biomass monitor and we were talking about the multiparameter sensor, but a lot of people said, 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 it's not uncommon for us to contact somebody again, and then say, oh, yeah, I saw when you contacted me six months ago with the relevant peer-reviewed article for my research. I pass it on to my people, but now we're in the budget cycle where we can put it into our budget and we're interested in a demo of the new system.
So this is -- it's not just like we just snapped our fingers and launched the product, now everybody's interested. We've been building this head of pressure for quite some time, and we're excited to now be harvesting that.

Joe Dorame

Great. All right. So last one on bioprocessing. Now that things seem to be normalizing more, how do you the competitive dynamics shifting in bioprocessing?

John Moore

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 constantly looking to do things like make breakthroughs like biodegradable plastics to eliminate problems like microplastics zero, impacting the world health issues like fertility rates. And there's some really, really big opportunities that our customers are addressing, but the dominant five by a processing tool manufacturers. They're more focused on selling products they already have and then acquiring companies that are innovative.
There just hasn't been a lot of innovation in this space. And so that's consequently why people are really astonished when we say, the cheapest and most common bioreactor in science, we figured out a way to bring monitoring and control. And 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.
We're the only people that are doing it. We have substantial not only economic but also technological and intellectual property moat. And I think this is going to be a franchise that our shareholders are going to benefit for many years to come.

Operator

(Operator Instructions) 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.