Nanalysis Scientific Corp. (NSCI) Earnings Call Transcript & Summary

Good day. It's Wednesday, October 20. I'm Martin Gagel with Market Radius Research. Today, we've got CEO, Sean Krakiwsky; and CFO, Luke Caplette of Nanalysis joining us. Nanalysis is a global developer and manufacturer of compact magnetic resonance imaging and spectroscopy technology products, software and services. I've got an analysis on the call today for a few reasons. I think the technology is fascinating. And it's seldom to see a small micro-cap Canadian company with so many real science and developing so much cutting-edge technology. I also see the industry and the company's opportunities parallel in many ways to the dynamics of the PC and semiconductor industry from 30, 40 years ago, so I see a lot of growth opportunities there. I've known the company and been a shareholder for several years, and it's great to see the company execute their vision and their business plan. Remember, this is neither a recommendation nor investment advice. We're here to learn about the company. Sean and Luke, thanks for joining us today. And take it away, let's hear about the story.

Thanks very much, Martin. It's a pleasure to be here with you and your subscribers. And yes, as you mentioned, we make portable NMR and MRI machines for industrial and health care applications. We do seek safe harbor for forward-looking statements. I'm the founder of the company. I started the business 11 years ago. By education, I have a master's degree in electrical engineering, but really I'm a tech start-up guy. This is my third tech start-up. We have a fabulous CFO, who's on the call today, Luke Caplette, with just tremendous M&A and corporate finance experience. And then Julien Muller, our CTO, who has a really unique vision for the future of magnetic resonance. Where we're trading at today, we have a market cap just under $100 million. We have 77 million outstanding shares. If you look at our last financials that have been announced, we're at a revenue run rate of about $17 million per year. We're all cashed up. So about $14 million in the bank right now, and we've got demonstrated profitability in the form of positive EBITDA and a little bit of positive net income as well. So we're not one of these tech companies that's burning boatloads of cash at this stage in our business. A lot of levers we can draw on to optimize what we're doing over the next couple of years. So our vision is to one day disrupt the MRI space. We feel like it's broken. It doesn't work the way it should work. The way it should work is any one of us should be able to make an appointment at our local pharmacy, go down and sit in a nice chair, have an MRI of our prostate or our pelvis area. It should be connected to the cloud driven by AI and then accessed by a trusted service like WebMD. And then we should get a pleasant message saying, no problem with your prostate or nothing unusual with your ovaries, no need to consult your doctor. Or similarly, if you're paying football on a Friday night in East Texas and you get your bell rung, and you should be able to go into the locker room and have an MRI of your head and determine conclusively if you've had a concussion or not. So that's our grand vision. That's where we're going. In terms of where we're at today, we have proven products in the marketplace. We've demonstrated explosive revenue growth, and we have an impressive suite of intellectual property. Just to sort of get calibrated with our subscribers and everyone on this call here and -- about magnetic resonance and establish a common frame of reference so that we can kind of discuss this accurately and efficiently, there's a part of this story that everybody will get and then there's a twist. And it's the twist that makes us unique in the world both as a stock and as a company. So the part that everybody will sort of get and connect with, as I've depicted in the bottom left here, the picture with the blue tent, a typical MRI machine in a hospital. It's very large and expensive. It uses superconducting magnets, requires liquid helium fills to keep the superconducting magnets cool. It's complicated to use. It's behind a gatekeeper and so on and so forth. And you made an analogy to computing, and we think that these MRI machines that are the incumbent machines are analogous to the old mainframe computers, where the end users couldn't really use them themselves. So that's the part of the story that sort of everybody will get. But the twist is most people don't realize that these machines are also used in industrial analysis. So they're configured slightly differently, but the technology and the basic math and physics are exactly the same. And I've depicted one of those configurations to the left with the person in the lab coat. The same superconducting magnets requiring the same liquid helium fills to keep them cool, it's the same electronics, the same low-level software. But rather than creating an image, they tell you exactly what molecules and how many molecules are in a substance of interest. But from a technology platform, they're exactly the same. So what we've done is we've miniaturized this technology and made it cryogen free. So no liquid helium fills. So that's what makes us unique in the world. And in fact, on this next slide, I'll show you what our current product portfolio is. The products on the top left are the products that are sold into the industrial analysis side of this opportunity. They're the full miniaturized system, including the miniaturized magnet, the electronics and the software. Now the product on the top left is, in fact, a medical imaging product. It's not the full system, but it includes the electronics and low-level software, the same electronics and low-level software that are in all of our products depicted here. But it's sold on an OEM basis, and it's sold to like Tier 2 preclinical imaging companies like Mediso. It's sold to -- into organizations in China that are developing next-generation MRI systems. So we built a common technology platform that leverages the commonalities between magnetic resonance for industrial analysis and magnetic resonance for medical imaging. And as I've said, the basic math and physics of both of those opportunities are the same. So with...

Sean?

Go ahead, Martin. Go ahead, Martin.

Are you referring to the MRI console on...

Yes, on the top right of this slide.

Okay.

The MRI console is indeed the medical imaging product per se. It's sold as a product. And we've generated in trailing 12 months approximately $2 million in revenue on the medical imaging side of our business. So it's a real and growing part of our side of our business. The majority of our business today is associated with the industrial analysis and -- namely the products on the top left here, the 60 megahertz and the 100 megahertz products, as I've depicted on this slide.

So the MRI console, you would -- that is the brains of it? So you have the taken MRI machine, plugged it into it and then it would control it and extract the data out of it? So it's a new control unit?

That's exactly right. And it provides people that operate those machines in certain research environments and so on with more flexibility to generate different types of data and so on. And it's really associated with the initiatives to develop next-generation MRI machines.

I always like to make analogies, and I always step too far with them. But let's say if it's the TV, you're going from like a cable box to like a smart TV, like an Apple TV, so you can do more stuff? You can take the data and do more things with the same dumb TV?

That's exactly right. That's a great analogy, and I'll build on that a little bit. So people wouldn't -- civilians wouldn't really know this, but the MRI machines that are currently in hospitals only look at one type of atom in the human body, the hydrogen atom. And it's basically a glorified way of looking at water flow in the human body and then some smarts to interpret the water flow, right, for abnormal tissue. But there's other important atoms in the body that also should be looked at when doing medical imaging like carbon atoms. And so our technology has the capability to look at other types of atoms and to do more particular analyses, not just create an image that is interpreted but actually to determine which cells are cancerous and which ones are not. And so that's associated with the visionary part of our business and really bringing the state of the art of the science and the technology into the medical imaging space today because the MRI machines that are in hospitals today do not reflect the state of the art of the technology.

Okay. And then -- sorry, I guess I'm getting ahead of myself quite in that -- my whole PC analogy. Like as computers developed, it was kind of a box. Now you've got the video card, you've got the software, you've got different components and you can kind of mix and match. And you're providing these big MRI machines where you just bought one big box, you're providing them some componentry to create better or different information or uses out of it?

That's exactly right.

All right.

Right. So yes. So really the main point of this slide is to convey to our viewers what our product portfolio is and what our current business model is. So our current business model is capital equipment sales at high gross margins. So we're at 65% right now. We think we can push those in the direction of 75%. And so we'll always be a product company per se. But we are super imposing other types of revenue streams on top of this sort of capital equipment sales, namely software. So we just closed an acquisition of a company called One Moon Scientific that has a software package for magnetic resonance applications called NMRFx. And so we just -- for the first time in our company, we started to price out software differently. And then we're -- the way we're evolving that is you're going to do the basic data analysis on the machine. And then if you want to do more advanced processing, you go off on to the cloud. And so as that happens, we'll be able to introduce a software-as-a-service revenue stream as well. In addition to that, we'll also have a consumables part of our business going forward, like a cartridge aspect or a cartridge that is consumed and then more purchased from us from our customers. So that'll be another future revenue stream in addition to the capital equipment sales.

Sean, and maybe I -- we'll get to this further when we talk about financing, you talked about increasing gross margins. Are you seeing that coming from that, you have pricing power? Or let's say your 100 megahertz unit's relatively new. Are you still kind of working down the cost curve so that the first 50 units you build are going to be higher cost, but then the next 50 units you'll have created efficiencies and it'll be lower to manufacture?

Yes, it's both of those things. So we are seeing that we have pricing power. There's tremendous uptake for our 100 megahertz product. So we're not seeing any softness in pricing at all. We're seeing strength on the pricing side. And then you're totally right, we have not exhausted cost reduction opportunities at all. And as we continue to scale up our business, those economies of scale will allow us to reduce our costs. You made a particular point about that in that our 100 megahertz is a new product. And yes, our costs tend to be higher on a new product. And then after several quarters on a particular product, they go down dramatically. So that's exactly right.

All right.

So I'll just talk a little bit about where we came from. So as I mentioned, I started the company from scratch 11 years ago, hired some pretty smart people from Caltech and MIT, moved them up to our facility in Calgary. And they're still with the company, shareholders driving us towards our vision. We developed the IP strategy and the tech platform in-house ourselves. We built the products ourselves, the manufacturing. And then as we evolved, we started to build out our direct sales organization, our distributor sales, marketing, HR, corporate finance, the whole ball of wax. So we -- the vision is and has always been to build out a full-blown operating company. About 2.5 years ago, we had a chance to exit. It's a large American company that had failed to develop a competing product and then tried to buy us. And it was a real sort of galvanizing and unifying moment for our company because our key shareholders, and we're backed by the largest angel investor group in this region called Q Group, they didn't want sell. And they came to me and said, Sean, we're having too much fun. We want to put more money in the business, not take money out. So build a world-class company right here in Calgary. I said, "Absolutely fabulous. I'm excited to do that." And I said, "What I really want to do is I want to go public because I want to buy some companies, and I want to have a PubCo vehicle to do that." So in June of 2019, we went public on the venture exchange. We did a concurrent financing of $6.5 million at $0.60 per share, which was the price that our exit opportunity was at. And then since we've gone public, we've done what we said we're going to do. We've closed 2 acquisitions, and we've launched a new product, which, again, has a tremendous reception in the marketplace. So it's just been a fabulous first decade, but we think our next decade is going to be even better for our company. And we have some exciting things in terms of short-term catalysts coming down the pike. We're starting to see independent research analysts initiate coverage of our company. Recently, there was one put out by Echelon, which was an excellent report, and I invite everybody to look at that if they want to read 35 pages of detail on where our business is going. And we expect other analysts to initiate coverage soon as well. You'll see us close our next acquisition fairly soon. You'll see partnering announcements. You'll see continued demonstration of explosive revenue growth. So really some exciting things both in the short term, the medium term. And then, with our grand vision down the road, we think the future is very bright for Nanalysis.

When you founded the company, was that like -- you've got an engineering electrical engineering background. But was it sort of some core IP out of like University of Calgary that you're licensing? And I'm guessing -- or do you have any sort of long-term licensing deal, someone who owns kind of the core technology that you still write checks to every month or...

No, we developed all the IP from scratch. There was a connection. I can -- I don't mind telling the story of how the company got started if you'd like.

Sure. If it doesn't go too long, yes, let's hear it.

Okay. I'll try to keep it short. So a friend of mine, who's also a professor of electrical engineering at the University of Calgary, Michael Okoniewski, Dr. Michael Okoniewski, called me up one day, and I hadn't seen him for a while. And he said, "Hey, I want to meet you tomorrow at the university hospital. There's something I want to show you." I thought -- said, "Sure, Michael, I haven't seen you in a while. Let's catch up." So I go there, and he introduced me to a bunch of scientists and shows me this gigantic machine. I said, "Hey, Michael, what's this?" "Well, it's called a nuclear magnetic resonance analyzer." And "Oh, fabulous. And these are great people, but why am I here?" Well, he says, "Well, I want to build a business around miniaturizing this." So I kind of got intrigued. And he told me about how these things are widely used in industry and exactly what they do. They can determine what molecules and how many of them are in any substance of interest. And so got further intrigued. He started to share some ideas about intellectual property. Pretty smart guy. And so basically, he had me hooked. And we went for lunch. And then at the end of the lunch meeting, he said, "There's one more thing, maybe the most exciting thing about this opportunity." And he showed me a picture of an MRI machine. And of course, I knew what an MRI machine was, and I said, "Well, that's great." He says, "Sean, if we can miniaturize the configurations that are used for industrial analysis and build up a solid revenue stream and business foundation there, we can also miniaturize and democratize these MRI machines because the technology is the same, the math and physics is the same." So that sort of sent me over the moon and got me really excited about the opportunity. That was in October 2008. And basically, instead of going home, I drove directly to my lawyer's office and we incorporated the company right then.

Wow. And you seem to have a clear sort of vision and pathway even like 13 years ago. That's kind of cool.

For sure. And here's a senior guy that's been thinking about science and technologies his whole life, right? He's actually on our Board of Directors right now as well. So world-renowned scientist in magnetic resonance. So here's an example again of our core team, whether it's on the Board or whether it's an engineer or a scientist from 11 years ago but still all with the company. And then we just layered on really talented pieces as we've gone from phase to phase in our business, most recently, of course, our fabulous CFO, Luke Caplette.

All right. Let's move on.

Yes. So just our technology is patent protected with an exciting patent pipeline. We file in the United States and the EU, and we also file in places like India and China, So intellectual property is an important part of our business. In addition to the patents, we have an impressive suite of trade secrets which we add to every single day with our roughly 50 R&D scientists and engineers. And then a key part of the story is also proprietary manufacturing. When I started this business, I didn't want to do all this awesome innovation and then, as soon as we're successful, have it ripped off in China or India. So before we even had a product, we invested in proprietary manufacturing. And the fruit of that is, if you got a hold of one of our products in China today and you took it apart and you had 10 PhDs working for you that were smart enough to understand our patents, you still wouldn't be able to reverse-engineer our technology unless you knew exactly what we're doing in our proprietary manufacturing facility right here in Calgary, Canada. So our growth strategy is...

Sorry, Sean.

Go ahead, sorry.

And I'm thinking, the hardware -- it's not just the hardware, how it's configured. But also then, you've got the software, the how to interpret it. And so you get these types of data. There's error correcting and figuring out. Like a bus goes by and creates an extra magnetic field and how to sort of filter that out and all that. So it's a real like tight-knit integration between the hardware and the software to make it work? You can't sort of layer one software onto someone else's magnets and get it working or anything?

That's absolutely correct. So it's hardware, it's firmware and it's software. And they definitely work in an integrated fashion, as you suggested there. And even just within the hardware world, one of the reasons why these big companies have tried to build these systems and failed is because the overall system is not totally digital. There's a big digital part of it, for sure, but it's still largely an analog system. And I'll -- when I talk analog, I like to say a real system. And real systems that have to work precisely not just in a sort of digital way but in a real physical way are extremely difficult to both design and to manufacture properly. So even just the hardware part of it would be impossible to reverse-engineer unless you knew exactly what processes were involved in manufacturing them in our facility in Calgary.

I guess that's why they call it hardware.

There you go. So in terms of our growth strategy, we'll always be an innovation company with new products at different price points. In absolute terms, our R&D budgets will always go up year-over-year. On a percentage basis, they will go down and settle towards the kind of classic 12% of our overall budget, but they'll go up in absolute terms. And then we'll blend that sort of organic innovation with industry partnerships where we OEM our products to big companies that want to take them deep into verticals. We publicly announced some of those partnerships. And in some cases, they add a little bit of value-added software on top of it, and then, of course, rebrand it with their market reach and everything like that, and we maintain ingredient branding. And then, of course, we've talked about acquisitions, and there are still about 10 more companies that I want to buy. And we've got flexibility on exactly what path we can traverse as we make those acquisitions, for example, depending on how the negotiations go. And they're all complementary companies, right? So this isn't a roll-up of similar companies and just exploiting cost synergies. We certainly do exploit cost synergies, but they're complementary companies. And so our first one was magnetic resonance electronics. Our second one was high-Level magnetic resonance application software. We're looking at companies that have vertical-specific products but have lost the ability to do R&D and manufacturing because they've had some financial problems. So we'll sort of refresh them and bring them to life. And then we're looking at companies that are pure sales and service companies that operate profitably by definition and it's in their DNA to just do sales and service. So you'll see a fully different mix of companies that we buy. Now there are some common themes to these acquisitions. One of them is they tend to be run by kind of scientist/founder-type guys who have done some cool things. They don't know how to raise money. They don't know how to scale a business. They've kind of been banging their heads against the wall for 15, 20 years, in some cases. And they're ready to sort of join our consortium. Because our upside is still intact, we don't try to grind them down and kind of kill their dream. We try to make their dream come alive. All we do really is put risk underneath their story and free them up to do what they've always wanted to do. So -- but they're a little bit broken, and, therefore, we can buy them for like 1x trailing 12-month sales kind of thing. And then we spend about 6 months fixing them up a little bit, increase their revenue run rate and then it becomes even more accretive to existing shareholders. And if you look at where we trade, it's somewhere between 5 and 7x sales. So it gives you an idea of how accretive these kinds of acquisitions can be once we integrate them and then grow them. And they're fully complementary to our business. So it's not just buying revenue for the sake of buying revenue. It's complementary magnetic resonance center companies. And then another part of our growth strategy, which is very important, is how we communicate with the financial community. So over time, what you'll see there is you'll see us use more the language of medical imaging side of this opportunity because that's the side that the financial community understands the most. So right now, we're focusing on the unregulated industrial analysis side of this opportunity. And then we have a very specific strategy to catapult those right into the middle of a full-blown, FDA-approved human medical imaging MRI product with partners. So that sort of encapsulates our growth strategy. And one further thing sort of worth highlighting is that, yes, we're about miniaturization, right, lower cost, portability, that sort of thing. But it's even more broad than that. And that is about democratization or, as I like to call, the appification of magnetic resonance. So if you have a PhD in chemistry or if you're a radiologist, you can interpret the data on the left of this slide and then take actions on it. But our customers are telling us that in the future, it's not going to be their experts that are using our machines. It's going to be, for example, a mining technician who is trying to analyze a lithium brine pool and just wants one number, percent lithium in this brine pool. Or a prison official who has confiscated a suspicious white powder and just wants to know, is there methamphetamines or is there an opioid in this suspicious white power, red light, green light kind of a thing. So this is a huge initiative for our company. In a lot of cases, we develop these apps ourselves. And then in other cases, we work with third-party partners. This is our view of our market opportunity. So in a general sense, we're in the scientific instrumentation space. Some people will prefer to use the term test and measurement. It's roughly the same thing. Over $75 billion per year is spent on test and measurement equipment, and it's growing by 5% to 7% annually compounded. Everything in the modern world is tested and measured. You can't develop new products, you can't deal with health and safety, you can't deal with quality control and you certainly can't manufacture economically efficiency -- efficiently without test and measurement equipment. So we really love the general space that we're in. The addressable part of it for our company today is about $3 billion. And we think that with ongoing miniaturization and, as I mentioned, democratization, we can grow the addressable part of this opportunity for us. Many people at this point in the presentation say to me, Sean, well, who do you sell to today? So -- okay, so today, we're selling to like the biggest companies in the world like Pfizer and Eli Lilly and DuPont and BASF and Corning. And then we also sell to like tiny, little, 2-person biotech start-ups. We sell to the most famous universities in the world like Harvard and MIT and Oxford, but we'll also sell to like a little community college in rural Mississippi or rural India. And by the way, in those kind of places, there are no liquid helium trucks driving around to keep the superconducting magnets cool. So the cryogen-free aspect of our technology is a key growth driver for us. And then we sell to government labs all over the world like USGA and Health Canada.

Can we just go back? You mentioned you sell to some of the biggest organizations out there in the world and like there are no -- in other -- certain parts of the world, there's no hydrogen trucks driving around. You -- like these big machines, you -- you're, in a sense, complementary to them in some way and kind of replace them. This is like using the PC analogy. They're big mainframes or server farms, and yours is kind of a PC. You're not, like there's a world for it, a server farm to do heavy lifting and stuff. But if you just want to do a smaller, maybe less precise or not, you have the desktop machine, you can maybe test it out and then send it to the expensive machine for the even more detailed -- how is it kind of used? Or in what ways is your used (sic) [ yours used ] versus the big, million-dollar machine?

Yes, you're totally right. And I really like the computing analogy because it's not an either/or scenario, it is indeed a both/and, right? And so when the first PC came out, a lot of people said, well, why would you create a personal computer, right? And then, of course, we know how that went. But the fact that all of us on this call are using laptops doesn't take away from the fact that there are still -- they're not called mainframes anymore, but there's specialized rooms with millions of dollars of blade servers in there, right? And so you're totally right. In the lab instrumentation world, it's the same thing. You're always going to have a need for $5 million, $20 million machines to do certain things. But then you also have a need for more expensive, more portable, easier-to-use, more accessible machines. So that's part of it. I mean there is a sort of perception out there that we're sort of taking away business from somebody who's considering buying a big machine. And in some cases, that's probably true. But to be honest, most of our customers have many of those big machines, but they can't use them in certain places, and they can't use them in certain circumstances. So they have several of our machines that they put in specialized places that they -- and they move around, and certain types of users use our machines and so on. So for example, if you're a Nobel Prize-winning researcher at Princeton and you're looking for the origins of life in an amoeba, you're not going to use our machines to do that. You're going to have a $20 million machine from broker. You're going you're to have like a $50 million budget for 10 years, and you're going to study amoebas in the $20 million machine. But if you're doing bread-and-butter organic chemistry at BASF or Corning, you don't need those large machines to do that. Our machines work just fine. And then to make the same analogy on the medical imaging side, if you have a catastrophic car accident and you rush to the hospital, you're not going to get put in a machine by an analysis, you're going to get put in a $20 million machine by General Electric. But those machines aren't required if you want to analyze your prostate in a preventative way or analyze a high school player's head at a rural high school. So you'll go in analysis machines. And just like on the industrial analysis side, the market opportunity, we believe, for the smaller machines and the more accessible machines, combined with the democratization of the data, is a bigger market opportunity than sort of the catastrophic or the researching the origins of the universe kind of market opportunity. so that -- we're positioned perfectly to take advantage of that.

All right.

So I'll talk a little bit about our team, and I've already mentioned that the original group that I put together 11 years ago are still all with the company and driving us towards our vision. We have a fabulous group of people that we've layered on top of them over the years to scale our business. I've already talked about our CFO, and he's going to talk about our Q2 financials here in a couple of slides, so I'll let him speak for himself. But we have a really fabulous senior independent Board of Directors. A couple of great examples there are Martin Burian, who's our Chairman. He came into our business concurrent with the public listing. I really hit it off with Martin during that process and kind of represents the new money that has come into our company since we've gone public. A really tremendous M&A experience. So he kind of ride shotgun with our CFO and I as VP of Corporate Development when we're doing these acquisitions. And then another great example is Werner Gartner, who's the Chairman of our Audit Committee. He's a former CFO of a large, NASDAQ-listed company called NovAtel GPS (sic) [ NovAtel, Inc. ]. So really, he scaled that business from like a $20 million market cap to a $1 billion market cap and kind of really knows what Luke and I are trying to do right here at Nanalysis. So just a fabulous team. And that's sort of the end of my part of the presentation other than to emphasize that our headcount today is 90 people. Fabulously talented, all shareholders in the company, really well motivated to make a success. Most of these people are in our facility in Calgary, but then we have full-time salespeople in different regions. And then we have about 25, growing to 30, employees in our facility in the heart of Europe in Strasbourg. So with that, maybe I'll -- unless, Martin, unless you had some questions, I'll turn it over to our CFO, Luke Caplette, who'll be happy to go over through a couple of slides and also answer any questions that you might have, Martin.

Yes, that's great. I do want to flip back to some of your prior slides after. We can do Luke's stuff first and then slip back. But -- so -- and Luke does not have a video today, so here's the voice of Luke here joining us. So Luke, why don't you take over and walk us through some of your -- the financial highlights?

Yes. Yes, thanks, Sean and Martin. Again, my apologies to everyone on the call. I don't have my webcam with me, so I'm incognito right now. But just to add some color kind of on Sean's presentation on how our Q2 numbers looked. I know it's kind of weird talking about Q2 and it's almost November, which is scary to think. We will be doing an earnings call in the middle of November with more details to follow on our Q3, so I'd encourage everyone on here to look out for that and take part. But for our Q2 numbers, as Sean alluded to, we are seeing a 100% growth. So we're up 118% quarter-over-quarter, which we're very excited about. And we're still seeing a large back order on our 100 megahertz. So as at Q2, we still had 2,400 megahertz on preorder, and we're still seeing orders continue to come in. So one of the issues, I guess -- maybe not an issue, probably a good problem to have because demand is so high for the 100 megahertz, is we did have limited production capacity for the last few months. So we've only shipped 1,500 megahertz as at June 30, with 24 (sic) [ 2,400 ] on preorder, and we made the decision to increase -- double the size of our manufacturing facility in order to alleviate that capacity constraint. So we're only at 3,000 a month during the quarter of Q2. We have a goal of 10,000 a month come 2022. So the team is striving for that, getting everything set up.

Luke, you launched the 100 megahertz back in December or January. So this is still early in the launch here, right?

Yes. Yes, absolutely. We shipped a couple in December of 2020. But for the most part, really shipments started January 1, 2021.

And just roughly, the revenues in a 4-point -- like it doubled. What was the breakup of that? Like how much of that growth came out of like the 100 megahertz units or just organic growth coming out of the other products? Can you just roughly break out how those revenues are segmented?

Yes. Yes. Of course. So of that $4.3 million, $1.4 million of it roughly was 100 megahertz. So we're also seeing significant demand, still increasing demand actually for our 60 megahertz. And RS2D as well has been a huge contributor. So it's kind of all cylinders firing. The 100 megahertz is going to be our huge catalyst for growth coming into the future years here. And so when we get that goal of being able to produce and ship 10,000 a month, you can do the math really easy and say that's $1.5 million a month of just 100 megahertz that they have capacity for, demand we'll see. But that's how much we did in all of Q2. So we're really excited for everything to come on board online in our expansion in the manufacturing facility.

And on that note, I'll kind of dive into margins. So our margins were 67% for Q2. As you alluded to, Martin, we're not seeing any pricing pressures. We think it's the opposite as orders continue to come in. And any time you're moving something from R&D down into an actual production stage, we see some inefficiencies that -- like for example, assembling the magnet array could take 200 hours, and the R&D team is working to get that down to 50. So we're confident that those margins are going to stay healthy and continue to increase. Also important to note on our expansion, it's really cheap. It's not capital intensive for us to expand. We have our SMT machine for making boards. We have our CNC machine. That's not at full capacity. So it's not like we're going out there and spending millions and millions of dollars in order to expand. We've put up a few walls. We hired some really smart interns from UofC that we get government grants back for them, put them on the floor. And it's really, really cheap to expand our capacity. That being said, we did do $1.2 million in Q2 for EBITDA. So we are cash flow positive. We did our raise. This was a key metric for doing our raise and getting in the $11 million that we did. We didn't need the cash. We pay our 50 scientists on our operations itself right now. But the cash is going to help us expand the acquisition strategy that we're really excited about over here that Sean alluded to. If you'll pop on the next slide for me, Sean. Thank you. So yes, like I said, we didn't need the cash. We had $4 million in the bank. Obviously, we raised another $11 million. It was a part bought deal private placement that we closed on August 25. So we're really excited about that. We're going to put that to good use to start acquiring some companies that we've been in talks with for a while and we're excited about. I get asked a lot on inventories. So at June 30, we had $2.8 million of inventory. We keep a really healthy inventory balance right now. It's twofold. One, obviously, we're seeing some inflationary pricing pressures on some of our supplies. So it's better to order now when we know price increases are coming. We're not hurting for cash. Number two is just being cognizant of procurement issues right now. So we're not immune to all the shipping procurement issues, but we are very diligent. And we've been carefully monitoring lead times for important parts. So we're stocked up on inventory, and we're making sure we're careful that we're not going to be stuck with some vendor shipping time lines that impact our capacity to produce. We did have $3.5 million of unearned revenue. So I'd like to just point this out because as accountants, we like to complicate everything. Unearned revenue is a little different from backlog. So when I say we have 2,400 megahertz on preorder and we have $3.4 million in unearned revenue, those are different metrics. Unearned revenue is what we've already been paid for. So if you kind of look at my breakout, only $1 million of that is actually related to those 2,400 megahertz preorders. So if you kind of do some fun math, okay, you have x number of preorders. $1 million of that is 100 megahertz. We have roughly $5 million of backlog sitting on our books right now. And then last but not least, all of our debt is interest free. We get tons of government grants. So we're always being as smart as possible where we can get our capital, where we can get funding from the government support, keep margins high. We just won a gamma MRI project that we announced previously, I think, around January 2021 for $1.2 million nonrefundable. We did something called CIR, which is SR&ED credits. That's over in France to support our R&D efforts in France. That's roughly $300,000 a year. We're taking advantage of the new SR&ED program in Alberta here for 2021. That could be upwards up to $800,000 per year. Conservatively, we're assuming we'll be around $250,000 to $400,000 on that. We do get some industrial grants, $150,000 a year. And as I previously mentioned, we get grants for our interns, and any new hire is 25%. So we're very cognizant, and we're making sure we can turn over every rock where there's some money to be found.

Luke and -- my apologies. Luke and Sean, you've got a healthy balance sheet right now, and you are profitable. What is the basic plan for -- with that extra cash on the balance sheet? Are you going to be raising spending up? Or like you could hit the accelerator and burn a whole bunch of money and hire 100 salespeople around the world. Are you trying to grow at sort of like cash flow-neutral basis or trying to -- let's say every year, we're going to put together a couple of million in EBITDA? Or are you going to try to grow EBIT? What are your priorities in revenue versus sort of harvesting in terms of profitability?

Good question. Do you want that one, Sean, or you want me to take it?

You are free to go ahead, Luke.

Sure. Yes. So obviously, being cash flow positive is always what we're striving to be. So we are using some of that cash for expansion. But as Sean said, it's all economy of scale. So we're hiring a couple of people. But if you're getting 7 more 100 megahertz out, you're actually just improving your cash flow, your margins, your EBITDA. So we're going to continue to operate with cash flow always in mind. We're always going to strive to be a cash flowing business. But we're going to use -- the funds on hand is set aside for acquisitions. And it's going to be the same type of structure that we've done in the last couple, where it's not a whole bunch of cash. It's usually kind of a 50-50 because we don't want to buy a great company and they got to disappear if there's money and it's not vested in the overall health of Nanalysis. So everyone's tied in with 50% paper, some healthy earnout targets. And we're all working towards the same goal.

So that's the ideal structure for your M&A, is -- would you be willing to go 100% cash on that? Or is it just a buyer saying, hey, I built this business, I want to pay off the mortgage and take a little bit of stress off, but I want to keep some growth in my opportunities?

I'll push that one to you there, Sean, since...

Yes, that's definitely -- we would never buy a company for 100% cash. That's just totally counter to the philosophical pillars behind our acquisitions, right? These are largely -- I mean, Luke used an example of 50-50 and maybe even higher ratio of stock than that. I think the next one that we're looking that's at the top of our priority is like 65% of stock and a minority of cash. So yes, it's to basically help the company do what they wanted to do on their own but couldn't and increase the value of their equity position, so.

And that indicates you'd be keeping the founder or the guys running the shop, and you -- and then a lot of that is structured on earnout as well? Like we're buying the business, but you still have to execute to get the full worth? And so they're fully on site to execute well over the coming years?

That's absolutely right. So we -- we're -- I'll give you an example in the case of our first acquisition, the founder. There's a few founders, but the main founder stock -- stayed with us for 2 years to help us get the integration fully accomplished and transfer all the customer relationships. He's just about to turn 70 years old. So now it's sort of like, okay, well, that was great for 2 years, and then we'll think about transition out into retirement in an orderly fashion. But then another one of the founders, sort of a minority founder that's now our CTO. And he's 42 years of age. He's at the prime of his career, and he's going to be a key guy for our company over the next 10 years. So that's the kind of way we work with the founders depending on the specifics of their situation and the stage of their career and so on.

All right, thank you.

My pleasure. So I think Luke and I have gone through the deck in a way that is consistent with our usual approach. So at this point, Martin, you're definitely the boss. So if you want us to flip around some more to previous slides or ask us some more questions.

Yes, I'd love to. If you could flip back. I think it's 2 or 3 before you've gone into the financials. I guess -- no, one more. One -- got it. Got them. All right, let's -- on your growth strategy, you're essentially -- you're going to be -- so certainly, your typical growth strategies are you just -- you buy revenues or you buy distribution, you buy technology and you buy into new market opportunities. And it sounds like you're not buying revenue just for revenue. It's all very strategic. But do I have that right? And I don't know, can you give a little more nuance to that?

Yes, you're absolutely right. The way I think of it is we have a growth pipeline, right? And so we have like long-term aspects of our growth pipeline, we have medium-term aspects, and then we have short-term aspects of our growth pipeline. When I talk about our growth pipeline, I just mean in general for our company. Not just specifically sales but just in general. And so my job as CEO is to make sure that our growth pipeline, in a way that makes sense, is full for the next 10 years, right? So this very day, I will be working on stuff that contributes to our growth in the next 2 months. I'll also be working on stuff that's going to contribute to our growth in 2 years from now. And I'll also be working on real things that contribute to our growth 5 to 7 years from now. And I spend every day on that growth pipeline and making sure that it's full. In terms of specific, that growth pipeline involves future new products that we're developing organically. And it involves acquisitions, like specific acquisitions, and building those relationships with companies because I know that in 2 years, I'm going to want to buy them. So I'm building on the relationship foundation right now. It involves industry partnerships and new verticals. And then it also involves sort of honing my story on how I communicate with new types of investors and kind of learning what their perspective is on our story and trying to improve how I tell our story. So all aspects of our growth pipeline is critical to our company.

Can you talk about your distribution currently? How are you making your sales? Is it through an internal network? Through distributors? And where is your -- are you -- do you have -- is it sort of spread out globally? Are you more North American focused or concentrated?

Yes. So our most important market is the United States, and we sell direct in the United States. We also sell direct in Canada and Switzerland and Germany and France. And my vision is that in the major markets in the world, to build out our direct sales organization and service. And so looking forward into the future, when we have medical imaging products for human beings as well as industrial analysis products, my vision is to be able to do direct sales and service, whether it's a hospital in Menlo Park, California or whether it's a corn processing facility in Iowa, right? So so we know that direct sales of our current products works better than distributor sales. We do have a pretty good distributor network, but we need to continue to enhance it. So for example, today, our products in China or India or Indonesia or Chile are sold through a network of dealers. And these are dealers that would sell complementary products and services and, therefore, be knocking on the same doors that we would be knocking on if we had a direct presence in those particular markets. So we'll continue to expand our sales and distributor network kind of organically, but we'll also -- it's also pertinent to our acquisition strategy. And we expect that it's highly likely that one of those will be something that you'll be hearing about fairly soon.

I would -- is not using distributors in the local markets or the sort of the G7, call it, is that because yours is still a kind of a relatively new product class and you have to sort of educate them, this is what we do? Oh, I didn't know there was a desktop NMR machine. And once it would maybe be, oh, I get a whatever, a radio -- I don't know all the different instruments, but you're one in a sort of a catalog, then that could maybe be pushed off a distributor? Just maybe that's years and -- but is that roughly sort of the rationale for how it's structured at this point?

That's absolutely right. In terms of like the product adoption life cycle bell curve, right, we're still at the beginning stages of that bell curve. In fact, statistically, the penetration of our opportunity is still 0%, right? It's totally greenfields. And our salespeople have to have really good knowledge on the applications that are associated with our devices. And so we do have some success with some distributors. For example, our distributor in India is excellent. Our distributor in Japan is excellent. But then we have some distributors that really aren't doing a great job for us yet, and we need to continue to educate them. So as our products become closer to the top of that product adoption bell curve, that's when we'll -- large distribution deals with very large companies that really need volume like huge volumes in order to make those deals work, that's when you'll see some of those things. And then in our particular case, there'll be value-added distribution deals, right? And so both in terms of their large brand but also in terms of a layer of software that is specific to a particular vertical market. So you'll see those types of deals coming down the pike as well. But right now, we know we have a fabulous direct sales organization, and we're going to do a couple of very particular things to grow that sales organization. One of the things that has been a philosophical point for me when I founded the company is -- I mentioned one. I didn't want to have our technology ripped off, so I took specific steps there. But I also wanted to always control my own destiny. So we control our fate with our direct sales organization. And to the extent -- so I'm never going to look for like a savior in terms of our growth. I don't need a savior. We're our own savior, and part of that is a strong and awesome direct sales organization.

When you're selling, are you selling to people who kind of never knew they had the sort of problem that you're solving for them? Like they never knew a desktop machine existed, so like, oh, we don't -- and then like, oh, we could use that. We've never thought about that opportunity. We always sort of waited in line to get access for a couple of days to the $1 million machine. Or how does that sort of -- and do you compete with like -- do you compete with other guys? Like, oh, well, we're looking at yours versus the broker or the -- whoever others, simple, and then we're going to do like a taste test, so to speak. Who is going to win this?

Yes, a typical reaction when we meet a new potential customer is, and this is like almost a literal quote, "Wow, I didn't know magnetic resonance can be so small." And that's a pretty good starting point to begin a sales cycle. And so what has happened over the last 25 years is, and now I'm referring to my slide here, the picture on the bottom left, these large machines for industrial analysis, they've established themselves as the gold standard. So you would always want to use magnetic resonance to analyze your olive oil or your jet fuel or your new drug or your cannabis oil or your polymer or your -- you'd always want to use magnetic resonance if you could, right? So we haven't had to educate our market on the benefits of using magnetic resonance. All we've done is said, hey, we've built this awesome miniature device that you can use anywhere, and it's very easy to use. You can use it directly. You don't have to send your sample to a different department or a different place in your campus or to a different city and wait 3 days to get it back. So it's a really nice thing to market. Our customers are more knowledgable than we are on how magnetic resonance is used. And so we just need to kind of get them comfortable with -- kind of application by application get them comfortable with the specifics of the small machine compared to the big machine. But those specifics are pretty minor.

Okay. And so how big -- like you talked about a $3 billion market opportunity, I think. Like how many -- like do you have direct competitors on sort of the desktop? Couple hundred thousand unit? And how big is the current market?

Yes. We -- I mean, like I say, I think last year, like I said, the penetration of this $3 billion market opportunity is still basically 0. So last year, something like $30 million would have been spent in this area, and we think that's going to continue to double every year for many years to come.

So you're one of the leaders in that? You've got, what, 1/3 market -- 30% to 50% market share? I'm not exactly sure that all your revenue is segmented, but somewhere in that range?

That's right. And so we are the leader in this space. And we do have an arch competitor, though, that we have a lot of respect for that's a formidable opponent. It's a company called Magritek, and it's a New Zealand-based company, similar size to us. We feel our products and our technology are better because we've spent more time miniaturizing the magnet part of the system, which is the more -- the most difficult technical challenge. Early on, they spent more time and money on the electronics and low-level software side while we were focusing on the magnet. But we since leapfrogged them with our acquisition of the company in Europe, and then we've integrated their electronics and software into our overall system. But a great company. We compete against them every single day all over the world for real customer business, I mean. And on the medical imaging side, GE, Siemens and Philips have a cartel in place. They don't really view anybody as competitors. But one day, they will see us as a threat on that side as well.

And in that market, are you -- because you're supplying -- you -- we've talked before you do something like retrofits on MRI machines and sort of spruce up old machines. So you're not really going head-to-head with them? You're kind of picking up some crumbs in this giant market and finding a couple of little niches there?

That's right. And like I mentioned before, about $2 million of trailing 12-month revenue associated with medical imaging. We'll continue to grow that. We're working very closely with key suppliers, historical suppliers of GE, Siemens and Philips on the MRI space. So we're not taking on this grand challenge by ourselves. We're working very closely with partners, and several of those are serious acquisition targets of ours.

All right. Could you go to the slide where you have the BASF and the SARTEC -- or the Bosch, sorry? And so you've announced these deals where you're making really application-specific detectors. They're not going to be an all-around general PC where you can play video games and do whatever. It's going to be designed with the software. It's going to -- you're going to put in one type of sample or a small type, and it's going to give you a red light or a green light. And then it's just a tool that any bumpkin like me could just put in a dipstick, a sample, and it'd tell me if it's good or not good. Is that roughly it?

That's exactly right. The majority of our customers -- I'm going to almost say almost all of our customers today use our products as general-purpose analyzers. They analyze multiple things. And so in that sense, we're kind of a platform company, right? And then at the same time, we're incubating these specific analyzer products with partners to go deep in particular verticals. And so again, part of our sort of S-curve growth strategy for the future is to superimpose these deep vertical partnerships on top of the sales of our current products, which will always be a growth driver for us.

And on these, the -- some of these announcements have been out a while. What kind of time frame are we looking at until we start seeing some sort of commercial launch or traction or it's going to start hitting the revenue line on things?

Yes. We've talked about our growth for this year, and Luke mentioned we're on track to do [ full year ] growth. I'm stating publicly that I think we can do that again in 2022 and again in 2023. That sort of gets us from like $17 million to $30 million to like $60 million, $70 million in revenue. The majority of that is going to be with our current product portfolio and maybe 30% of it through some acquisitions that we'll do. So we're not really relying on these partnerships with Bosch and SARTEC and others, the German police called LKA for the growth in the next 2 years. So again, going back to my philosophical pillar of we're controlling our own destiny. To hit those numbers that I talked about, we can do that ourselves. I don't need to sign a giant deal with Bosch or SARTEC to hit those numbers, but we are working very seriously on these partnerships, and there's others that are in play, too, that haven't been publicly announced. And those are going to contribute to growth 18 months out, 2 years out and beyond. So that's one area of our business where the pandemic has delayed things. Just a real specific example is, we've been trying to schedule a test of our machines on a cargo ship with Bosch forever, but the pandemic has just made it impossible to do. Bosch is a by-the-book company. So all the rules associated with the pandemic, they follow explicitly. And -- but the relationship with them has been fabulous, and we continue to strengthen that relationship. But that's probably one of the areas that the pandemic has slowed down, is these partnerships that we've signed and have been working on have been delayed from the pandemic. So what I've done as CEO, I've tried to sort of flip a negative into a positive and, in Bosch's case, for example, show them that we're financially stable and strong, patient, reliable supplier they don't need to worry about. We're not in a panic like got to launch something with you next month or -- so they really appreciated that. And actually, we haven't publicly disclosed some of these items, but they started to introduce us into other vertical opportunities like fuel analyzers with large automotive companies associated with having them at gas stations and so on, associated with environmental regulations. So we've really been able to strengthen that relationship with Bosch and with some of these other entities, even though the technical joint development has slowed down a bit because of the pandemic.

Okay. So your growth -- your expected growth curve is not impacted, but still these are a couple of years away before they kind of start making some impact maybe here?

That's right. And those are kind of things that are going to take us from like a $70 million per year revenue company to like a $200 million to $300 million revenue company. That's where that growth is going to come into play.

And you talked about going into your local drugstore and getting your hip or your knee MRI and a quickie sort of self-service thing, and you're working down the path to that. I presume that is not near-term revenue as well. Is that like 5-, 10-year kind of time frame we're talking about?

Not that long, no.

No?

Not that long. So we're working with companies on that product right now, and I expect to pull the trigger on a key acquisition in that area in about 2 years. And that will catapult us right into the middle of an ongoing FDA-approved process for a product. So 3 to 5 years in terms of revenue generation on the human medical imaging side like in a big way, I mean. Not just in terms of the odd research area and so on but actually a full-blown marketed product. It'd be more like 3 to 5 years, not the numbers you talked about.

Okay.

And I really want to emphasize because this is a key part of our story, that all the work we're doing now on the industrial analysis side and on the partnership side, it's all contributing to that future FDA-approved product. They're not separate initiatives in any sense of that word.

Okay. And so we have a question here from the audience. What's going to drive revenue growth over the next year? I think we've kind of addressed that. But could you give us, let's say, over the next 6 or like -- geez, we're already almost out of '21 here. What kind of news flow coming out in '22 should we expect? Presumably, hopefully a higher revenue? Like continued revenue growth? Maybe an acquisition or 2? And like new product launches sort of? We've...

Yes. Yes -- I mean, so I'll just touch on the revenue thing. So the biggest growth driver for us in 2022 is going to be our 100 megahertz product, and I've shown that on this slide just to answer the specific question of your subscriber. And then in terms of your questions, the catalyst will be, yes, you're going to see partnering announcements like application partnerships. You're going to see us close at least one acquisition in the near term. I mean I'm shooting for before Christmas. And then further acquisitions in 2022. You'll see, of course, ongoing financial press releases about revenue growth and so on. You're going to see further independent analysts initiate coverage and putting out fabulous information on our company. My objective also, which I'm submitting to the Board, is to go -- to uplist. So there's -- we already satisfy the requirements for the big board. We already satisfy the requirements for the NASDAQ. But I'm thinking about possibly towards the end of 2022 uplisting to the TSX. NASDAQ people asked me about that, and that's something that's sort of part of the vision, is one day we will be a NASDAQ-listed company. But no need to do that now. And so that would be something that will be 3 or 4 years out, but it certainly sort of represents sort of the pinnacle of kind of where I want to go as a company.

All right. Well, with that, we're well over an hour here. So Sean, we really appreciate your time here talking to us and teaching us about Nanalysis. So we should wrap it up here. And I think you had some great closing comments here, but any sort of final wrap-up statement from you?

I really appreciate the opportunity to tell our story to your subscriber base, Martin. And I know I've known you for quite a few years, so I always enjoy speaking with you directly. And I just would like to sort of respectfully submit to your audience that I think our company is really unique, especially in terms of the venture exchange companies in that we have this grand vision that's going to turn us into a multibillion-dollar company. But we're also building a strong foundation with real products, real revenue, demonstrated profitability. And our path from here to that grand vision is incremental in nature, and you'll be -- you'll have full transparency on everything that we're doing from -- going from here to there. So I think in terms of the magnetic resonance side and the financial side, it makes us unique as a stock and also as a company. And I really I hope we get the support of your subscribers. I also like speaking to shareholders individually, so please reach out to me if you'd like to talk more.

All right, Sean and Luke, thank you very much for taking your time to chat with us. It's been great, very informative. And I'm looking forward to seeing what you get done at the rest of this year and through next year. Thank you very much and have a great day.

Thanks, Martin.