Scientific Industries Inc

Q1 2022 Earnings Conference Call

11/22/2021

spk07: Good afternoon and welcome to the Scientific Industries first quarter of fiscal year 2022 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 your telephone keypad. 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 Dorme, Managing Partner with LISM Partners. Please go ahead.
spk05: Thank you, Gary. Good afternoon, and thank you for joining us today to review the financial results of scientific industries for the first quarter of fiscal year 2022, ended September 30, 2021. With us today on the call are John Moore, Chairman, and Helena Santos, Chief Executive Officer. After the conclusion of today's prepared remarks, we'll open the call for questions. If anyone participating on today's call does not have a full text copy of the press release, you can retrieve it from the company's website at scientificindustries.com or numerous other financial websites. 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 June 30, 2021. 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 industry 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?
spk02: Good afternoon. Thank you, Joe. And thank you for attending our company's fiscal 2022 first quarter earnings call. The first quarter of fiscal 2022 experienced formidable results from the company's core business, the benchtop laboratory equipment operation, and began to record full quarterly revenues from the product sales of the bioprocessing systems operation. And that was due to the sales generated by Aquila Biolab products. Akilah was acquired by the company in the fourth quarter of fiscal 2021. I would like to take the opportunity to thank our valuable employees whose hard work and dedication helped us achieve our results during this quarter. As I am sure you all read in our 10Q, we experienced a 41% increase in revenues compared to last year's same quarter. And as you can also see, That increase was generated primarily from the benchtop lab equipment operation. So, what were the drivers of that increase, and what can we expect in the near and long-term future? The increased sales were a result of the continued demand for the flagship product, the Vortex Genie 2. We also came into the first quarter with a significant backlog from the fourth quarter of our fiscal 2021, and that was due to some labor challenges, which were resolved in the first quarter of this fiscal year. We had a couple key employees out during the summer on sick leave. We hired a few more direct labor employees, and we created a new position of operations manager and hired someone to fill that position, which also contributed to the positive results in this first quarter. We now have a total of 31 employees at the Benchtop Lab Equipment and we augmented our current facility in Bohemia with an additional 5,000 square feet of space, which is primarily being used for the Torbell Division's Vivid product line, as well as for additional warehousing space in general. Shortly after the start of the pandemic, we began to experience a sharp demand worldwide for the Vortex Genie 2, fueled by COVID testing labs' demands and then followed by SARS-related research. At the same time, we did experience a sharp decline in orders for other products that were not related to COVID. This is because many labs shut down and took a while to come back online. Also, most of our other products are not considered a commodity in the same way that the Vortex Genie 2 is considered. They are more of a discretionary purchase, which, based on our knowledge, were being put on hold. The demand for the Vortex Genie 2 is still healthy, and the demand for our other products has seen steady growth since the start of the pandemic. However, we have been impacted with part shortages for the non-Vortex Genie products. Most of these products are digital and therefore incorporate digital boards, which, as we all know, is a worldwide problem, no matter what industry, not just auto. Luckily, it has not affected our flagship product because that is an analog product. Looking forward, the 2021 industry outlook for the benchtop lab equipment market is at a growth rate of 10.6%, which combines COVID and non-COVID-related products. The 2022 industry outlook, and by that I mean calendar 2022, is a growth rate of 5.1%. which is in line with pre-COVID growth rates in our industry. As we disclosed in our 10Q, Torbell products account for about 20% to 25% of the total benchtop lab equipment product sales. Total Torbell product sales have remained at approximately the same levels as prior year quarters, and that's because the core Torbell products, which are basically the digital scale, did take a hit during COVID and have only recently began to recover. What has closed the gap on that decrease is the growth rate in the new Vivid pill counter. And we foresee continued growth from the Vivid pill counter in the near term and for the long term also from other Vivid projects in the pipeline. We are investing to launch the Vivid Light in fiscal Q4. and also the Vivid Workstation in Q2 of our fiscal 2023, barring any unforeseen circumstances or delays of any kind. Sales of the core Torvald scales are also making a recovery, and that's due in part to a new website that Mr. Nowaczewski has recently launched. I'm going to let John Moore give you some insight into the bioprocessing systems operations, but as you can see from the 10Q, the new AQUILA subsidiary generated $168,000 in product sales, and there was another $68,000 generated by the U.S. subsidiary of AQUILA product sold. We are still working on the integration of AQUILA after an initial period of studying and evaluating both businesses in depth, analyzing the synergies and what made more sense from all angles, administration, product development, sales, marketing, manufacturing, and even accounting and finance. There's still work to do, but I believe we have a good plan with an amazing team to implement it. The challenges that we face and the factors that could negatively impact us in the future are possible shortage of key components, which thus far has only had limited effect on our results, and that's been primarily in the form of shipping delays, possible labor issues, although that is not anticipated. We also expect that there may be some pressure on future gross margins due to increased raw material costs, which may not be fully passed on to customers due to competitive pressures. We minimize these risks by working very closely with our suppliers and providing a work-friendly environment to retain and attract our employees. Although in terms of cost increases, we are limited in what we can do. Example, all the Vortex Genies use a zinc die casting. That zinc, which is called Xamax 3, fluctuates in price, and the cost of our casting is dependent on the market price of Xamax 3, no matter where we source it. The bioprocessing system operations will continue to concentrate on immediate revenue generation from existing products and invest heavily in new product development, as John Moore will further discuss. And so with that, I'm going to turn it over to John.
spk03: Thank you so much, Helena. So we're making the appropriate investments to aggressively grow SBI. We see the opportunity to create a major new category in the bioprocessing field. We call the category SBI. digitally simplified bioprocessing. Others might understand it best as a key component to the first family of life science Internet of Things. We're building a system that we believe will be as ubiquitous as the Vortex Genie Mixer and the Torval Pharmacy Scale, but to be mission critical for our biotech customers, our OEM, and our channel partners. It will have all the benefits to our shareholders of a network system with recurring revenue. We've identified several critical components of our plan to build the system and to make it so compelling that it'll be unthinkable to develop and scale up biologic products without our system. Every quarter, we'll report to you on the progress that we're making as we build the system. First, I'd like to provide some clarity on the category we're creating. So what is digitally simplified bioprocessing? In our last shareholder call, we discussed how the synthetic biology revolution is enabling the re-architecting of industries as diverse as pharmaceuticals, energy, animal-free nutrition, agriculture, and water treatment. The synthetic biology revolution is driven by the collaboration of biology, engineering, regulatory, and data science professionals. However, with each discipline speaking a completely different distinctive language, the process of getting new products to market is disjointed and cumbersome. To move organisms expeditiously from discovery, characterization, transfection, scale-up, scale-down, and ultimately the manufacturing and regulatory approval, powerful new tools are required. Because of the twin challenges of cost and noncommunication between the disciplines, there's a real struggle to integrate the respective workflows. As a result, much of the most innovative members of the community are hamstrung by inconsistent and insufficient data sets from small-scale testing, human error, high labor costs, and challenges scaling up and down. Additionally, the data sets often do not have a wide enough variety of sensor data and governance. data set sizes are not appropriate to power machine learning or artificial intelligence studies. This was resulted in the biotech industry not benefiting from the productivity gains of other industries in our digital age. Peter Thiel notes in his book Zero to One, quote, despite dramatic advances in biotechnology over the past two centuries, in recent decades, biotechnology hasn't met the expectations of investors or patients. E. Rome's Law, that's Moore's Law spelled backwards, observes that the number of new drugs approved per billion dollars spent on R&D has halved every nine years since 1950. So EROM's law is more of a law spelled backwards. Since information technology accelerates faster than ever during those same years, the big question for biotech today is whether it will ever see similar progress, unquote. To solve the problem, SBI is hiring this new category of digitally simplified bioprocessing tools. The working title for the system is COCO, and that enables researchers to move from the current error in research by trial and error, albeit one based on the scientific method, to one amplified and accelerated by digital twins and computational tools. Digitally simplified bioprocessing means performing in hours years' worth of trial and error in silico and verified by affordable and scalable experiments with the smallest instrumented process scouting vessels. It's also an easy-to-use Rosetta Stone to help different disciplines work easily and productively together. SBI's digitally-synthesized bioprocessor system represents a step change in speed and price points from current industry offerings in capital and operating costs that will reverse Eroom's law. SBI's tools are the building blocks for the first live science Internet of Things, consisting of networks of proprietary tiny optical sensors that collect environmental and process parameters, soft sensors... powerful data analytics, visualization tools, and digital twins. This will seamlessly allow biologists, bioprocessing engineers, and data scientists to collaborate and bring biologic-based products to market faster and more affordably than ever. Here's our first update on our efforts to create the building blocks for COCO. The COCO software is being developed in the cloud to enable its rapid deployment. The team is making great progress, and our target is to launch the first commercial instance in the first half of 2022 to enhance the performance of the CGQ and the list devices that we're currently selling. We've hired a UX designer who's focused on making the user interface intuitive and easy to use. We're excited about the first generation of the software, which will feature adaptive control, something our customers and prospects have been asking for, so users can set and maintain their experiments in a fixed design space. This will be an industry-first, and offers an opportunity to upsell many of our existing customers. In the meantime, we're putting the finishing touches on the COCO software simulator that we can use to preview the target customers the type of data sets the system can create. Once the simulator is complete by year-end, we'll be scheduling demonstration calls with the senior technical managers at our largest target customers, our OEMs, and our channel partners. Sensors are an area of constant innovation for the team. Our customers are asking not only for dissolved oxygen and pH sensors, but also metabolites like glucose and lactate, among others. We are working with a network of researchers, as well as increasing the size of our internal staff, to expedite the commercial launch of our chemo sensors. Our first offerings, combined with the CGQ platform, will be launched early in the new calendar year. Hardware and communications. The U.S. SBI team visited Germany in the quarter as part of integrating the engineering and the application sciences. Three of our Pittsburgh SBI team will be moving to Germany in the new year to work on preparing COCO for its commercial launch. Work is proceeding on time to complete the design and integration of the housing, battery, radio, and the LED. One setback was some of the components designed into the COCO sensor are being affected by the current supply chain challenges. Given the realities beyond our control, we're having to redesign the hardware to replace hard-to-get parts with more readily available ones to reduce disruptions and part shortages. We've pre-ordered enough parts for 2,000 COCO readers to be produced at the end of 2022. So it's not enough to have a secret about the future. We have to move the community to that future. The critical step to making COCO a blockbuster product is connecting with the synthetic biology community, sharing the grand vision of COCO, and making the first but important steps to changing the current status quo mindset to manual biomass monitoring. and that is the current status quo. Most bioprocessing scientists take manual samples to figure out what the biomass is. We must convince the industry that modern fermentation scientists use real-time digital tools to do their jobs. The most effective way we can change the industry mindset is to raise awareness and sell more of our existing products, the CGQ and the LISP system. In the past quarter, we added to our existing base of over 280 customers. We added important institutions like the USDA, the National Renewable Energy Labs, as well as commercial partners like Conagen, AbSci, Molecular Templates, and Evonik. We received follow-on orders from existing customers at ADM, DSM, and Porcellis. We're currently prospecting over 3,000 commercial prospects and 1,000 over 1,000 academic collaborators, as well as investing in first-class digital marketing programs. Our biggest challenge is awareness of our solutions in the community. This week, we'll be launching our first pillar page on our website in order to dominate the organic search term biomass. We're also engaging with leaders in the biotech education at technical colleges and prestigious research institutes like University of Georgia's Fermentation Facility and Stanford University. We have also been engaging with key accounts, which include OEM opportunities like Sartorius, Danaher, and channel partners like Labware, the leading laboratory information management system provider. There are new channel partners emerging every day, like Inscripta, which has raised over $475 million to launch a new desktop gene editing tool, which could benefit from our solutions to further characterize newly engineered microbial strains more affordably and quickly than scaling to a bioreactor. Another major player in the life science Internet of Things is BenchLink, whose recent $100 million series F round was completed last month at a $6.1 billion valuation. We're working with the leading OEM accounts and channel partners to discuss integrating COCO into their product roadmaps and to support the value propositions of their new offerings. In acquiring Aquila Biolabs at the end of May 2021, we joined forces with a terrific and committed management and operating team with a powerful vision for the future of biologic research Process Development and Manufacturing. We thank you for your support. We're happy to take your questions now.
spk07: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Paul Knight with KeyBank. Please go ahead.
spk06: Hi, guys. How are you? Thanks for your time. Welcome, Paul. On a key level, could you talk, CGQ is for the microbial market right now, and it's pH of oxygen. Is that correct?
spk03: So I'm going to hand this over to Daniel Grunez. Daniel, would you mind addressing Paul's question?
spk00: Yeah, sure. Hi, Paul. Can you repeat the second part of your question? So the first one was CGQ is for microbial, and the second part was?
spk06: It's for pH and dissolved oxygen readings.
spk00: Yeah, so CGQ is the cell growth quantifier for biomass monitoring in microbial applications for now. And with pH and DO, these are then chemo sensors analyzed that we are working on to launch in beginning next year.
spk06: And the glucose and lactose, that'll be additional. And that'll be the COCO system.
spk00: No. So firstly, maybe just as a brief explanation. So in general, our entire industry right now is set up in a way to measure how we call it critical process parameters. And for now, that means, you know, the assumption is there are certain parameters that are critical to defining the outcome of your process. Biomass is a very important one. pH and DO are certainly very important ones. And then there are others. We call them analytes. In the beginning, all of that should at one point transition to the COCO platform. That should then be this universal sensor platform collecting all kinds of information from various kinds of data sources, whether it be external sensors that we integrate or proprietary sensors that we develop ourselves, those little COCO readers, if you remember. In the meantime, in order to bring things up to speed, what we want to do is whenever we have those analytical sensors, the CMOS sensors, ready either by partnering or by our own development, we will also be trying to launch them on the current platform that we know, which will then be the CGQ and the CGQuant software. That's what we were going to do as an intermediary step with PHDO and potentially glucose and lactate on our way to then also convincing and engaging with all the different prospects and partners and potential larger accounts so that they buy into our vision even prior to us launching COCO.
spk06: And you would mention you're trying to get supply for 2,000 COCO readers. What is a selling price for a system.
spk00: For a COCO system, you mean? Or a purchase price for a system? Yeah. Yeah. So we haven't defined that yet. Back then, or let's say I can tell you my ambition. My ambition is that from a perspective of cost of goods, manufacturing costs, and that's the tricky challenge that Helena mentioned. While we are in the fight for critical components, my ambition is to keep those costs low and ideally buy the parts at a cheaper price than we have for the CGQ system to also keep the gross margins at 80% and ideally higher. But we haven't defined the market price yet. I believe, if I look at the MVP-1, that's the current prototype that we're having for tests in the lab. There, the price point, the pure manufacturing cost, they are very similar to a CGQ sensor, so roughly 250, 300 euros, so $350 per piece, I would say. But that's not including any scaling effects because we buy them at quantities of 60 to 70 in terms of electronics and circuit boards and if you assume then the scaling effects economies of scale for 2000 and larger orders then we assume we can bring down the cost and that would enable us ideally a bit more flexibility with regards to market pricing although I must say with regards to a perspective on value based pricing which we want to do of course and knowing that we will have a much more ubiquitous application with, at the same time, miniaturization on the one hand while providing a much more universal sensing platform, I believe that we have a lot of potential for keeping and increasing our margins.
spk03: Okay. Paul, we're looking for like 80% gross margins on the hardware, and then on the software, of course, we're looking for a subscription-based business. So I know it's hard to model as we're trying to figure out what the market will bear with these systems, but we're working hard on it.
spk00: And maybe one more comment there. It helps you probably also to understand what we are doing in the next one or two quarters. So one of the things we had analyzed, one of the aspects we had analyzed in the first real quarter following the merger, which was this quarter, July to September, was also the personnel plan a bit going forward. And one of the vacancies we identified in the marketing team product development team, product management team, was a product manager specifically focusing on COCO and Experience One. And there, I think, I believe we have made a very good hire that will start beginning next year. Most likely, we are still in the process of trying to convince them to get out earlier of the contract that they are in. But they were entirely focused on identifying exactly that, what's the price point, what's the application we want to target initially, and that should help us, and that's an important task in the next one or two quarters.
spk06: Okay, thank you. And then on the lab product side, the $2.5 million, would you expect a little seasonal pickup there? in the past on that side of the business?
spk02: Yeah. I mean, our business is not really seasonal per se. Nothing that's material anyway.
spk01: So I would say that the answer is no.
spk06: And then you're adding 5,000 square feet to manufacturing. Is that a Is that for expected demand, or what's going on with the capacity add?
spk02: Okay. So, currently, we're at about 19,000 square feet, and we were already bolting at the scene. So, we already had some requirements for additional space as is.
spk01: But with the growth of the vivid pill counter, We needed more space, and so that is being used primarily for the production of the Vivid as it exists today and for the new Vivid products that will be coming down the pipeline. So that's what's going to be used for. So it's a combination, but primarily, if I had to tell you, it would probably be a good 60% to 70% would be dedicated to the Tarbell division.
spk06: Okay. And then last was the royalty, I think, is what you're referring to on the $68,000. When does that royalty stream expire?
spk02: Okay. So most of the royalty stream actually expired in August. We receive royalties once a year after the end of the calendar year. So it'll be somewhere in the first quarter, March or April.
spk01: Although there's a patent that expires in December 2023 that pertains to microplates, And that is not where the majority of the royalties are coming from. The majority of the royalties come from bags and related products.
spk02: And that's the patent that actually expired in August 2021. So as far as we're concerned and for your modeling purposes, royalties can be expected to be an insignificant part of bioprocessing revenue.
spk06: Okay. Thank you.
spk07: The next question is from Tim Chittard with Miros Investments. Please go ahead.
spk04: Oh, yeah. Hello, Tim. Thank you. Hello. Just wanted a little more color on the Vivid launch. I guess the first question, has that product formally been launched yet, or is it just anticipated to be launched sometime during this fiscal year?
spk02: Carl, why don't you take this?
spk08: Sure. What we call now the Vivid 1 has been out since March of 2020. The core product, the first Vivid, is fully out there and available. Next year, we're looking to introduce two additional models. The Vivid Lite, which we're looking to have a very affordable and more accessible unit from a pricing standpoint, and it's going to be a much watered-down and simplified version of the current Vivid that we have now. And later on in the year, we're looking to introduce the most advanced Vivid out there, which we will call the Vivid Workstation, which will be more equipped to do remote verification in the pharmacy and perform some telepharmacy functionality.
spk04: Right. And just to recap, I think it was mentioned that the Torval product line overall is about 20% of that segment. Is that correct?
spk02: It hovers between 20% to 25% of the Bench Top Lab Equipment segment sales.
spk01: That would be correct.
spk04: Got it. And a quarter or so ago when you had, I think when we first chatted, I was I'm trying to understand what the vision was for Vivid, and the pill counter segment seemed like it was poised to have some growth kind of related to the new product itself. Is there a way that you can just kind of give me the big picture on that business scenario? In other words, how big is that market today? What is your share of that market? What does Vivid do to your potential market share over some medium term? Just to try to understand kind of what the opportunity is there, because it sounded quite exciting, but I don't have all the pieces together as far as how to think about it.
spk08: Yeah, sure. So the Vivid is a vision-based pill counter, and Torval traditionally had access to the pharmacy market. And we kind of transitioned from counting by weight into vision-based technology. And it's a pill counter designed for You know, just completely, fully automating the pharmacy workflow in terms of processing transactions in the pharmacy and obviously allowing pharmacies to perform their daily count. What's really unique about our machine is that it's a cloud-based unit. It functions completely on the cloud and that's what really sets us apart from our users. It's a complete pill counting system. And so in terms of the market share, I think we're really just kind of getting started right now, but we've been able to, we're very successful with it, and it's going very, very well for us. I think, Helena, maybe you can talk a little bit about our sales and the numbers that we have.
spk02: Well, without getting too much into information which would not be public, the North American pill counter market is about $40 million. Now, that's all encompassing of all types of pill counters, not just the type of pill counters using the technology that we are talking about here with the Vivid. But that's roughly the size of the market, and if we achieve at least a 25 to 50 percent share of that market, you can see that could be substantial. We're not talking about the type of market like those of the bioprocessing systems in that industry. a nice market for us to go after, and that's also more, you know, immediate for us.
spk04: And, yeah, I understood to be, you know, kind of roughly that size, but it does seem like the, you know, everybody wants to save labor these days. Nobody has excess labor to move around. So it seemed like it had the chance really to kind of, take some share in that business, and it would be meaningful to the size of your company if you were to take a second to share that business. That's why I'm fishing for kind of the opportunity here. And during the remarks, you mentioned a growth rate based on some industry studies that I wanted to go back to. It was a 5% growth rate quoted, and then it was a 10.6% growth rate quoted. I wanted to tie that back to, is that benchmark? benchtop equipment, broadly speaking? Is that for pill counters? Is that for... And how does that relate to your revenue?
spk02: Oh, excellent question. That primarily relates to the 75% business, which is referred to as basically our genie brand division. That's general equipment and supplies under... $5,000, okay, that's how we define our market. So when I speak of that 10.6 and that 5.1, that's primarily for the Genie brand product and not for the pill counters. I don't have information on those growth rates. We can only speak of, you know, I only have information on our own growth rates and not on the industry, on the pill counting industry as a whole. But that's what I was referring to. And that's, you know, for a mature industry like the, you know, the general bench top lab equipment, that's what to expect. You know, pre-COVID, a good year would be, you know, 10% growth rate. A normal year would be in the single digits. Right now, we're, you know, we're obviously experiencing much higher growth rates than the 10.6. And I think because of our customer base, we will exceed, we expect to exceed that. I think that's a floor for us, but that's what that referred to.
spk04: Okay, yeah, I will. And then the comment related to getting components together and doing the work that you're doing with the U.S.-based team traveling to Europe and working with Akila, 2,000 reader sets, and I didn't quite catch what the timeframe was for that. You expect to have 2,000 Cocoa Reader sets complete?
spk03: to remind myself there. The end of 2022, so with any new product development, it's not so finely calibrated, but what we plan to be doing is the second half of the year to be sampling our lead customer relationships and those with the OEMs like the laboratory information management system companies like the big OEM accounts like Sartorius and Danaher, as well as some of the large pharmaceutical companies that we're talking to that are interested in being among the first users of this new sensoric Internet of Things.
spk04: I see, yeah. And 2022, is that fiscal or calendar?
spk03: So calendar, fiscal 22.
spk04: Oh, very helpful. Great. Thank you.
spk03: Thank you for your questions, Tim. Thank you.
spk07: This concludes our question and answer session. I would like to turn the conference back over to John Moore for any closing remarks.
spk03: Great. Well, thank you all for attending the call and taking time to learn more about scientific industries, and we look forward to reporting on our second quarter results that are coming up. Thank you very much.
spk07: The conference is now concluded. you for attending today's presentation. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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