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

Good morning, everyone. There is Sean. Can everyone hear me? Everyone could may be mute their microphone. Thank you for joining us. Obviously, we had the call yesterday. I'm not sure if everyone is able to listen to the replay. That is obviously on the Nanalysis website under Investors, and then there's a big tab called Events, and there's a replay available. Obviously, this format here is for the question-and-answer session for management. [Operator Instructions] So it's kind of an open format, and we did this once before. I think it went very well. So I've got a couple of questions that have already come in, but please, I'd like to just -- Sean, if you want to say any maybe opening comments. And with that, we'll open the floor for questions.

Sure. Can everybody hear me? Okay. Well, thanks to everybody for joining the call. It looks like we have a fairly decent turn out here. I see one of our directors is also on the call, Guido Cloetens, so thank you very much for that, Guido. And yes, we felt we had a good quarter. We're by no means finished the work that we have to do. I feel like we're right in the middle of like a crucible kind of period of our company where we've invested a lot of money in several initiatives, and we're trying to get them to bear fruit sort of almost simultaneously. And so, to me, this is a transitionary period for our company. And when we come out of it -- and I like to say in March, I think we're going to be a totally different company with the potential for significant cash flow and all of our -- of the synergies that we put in place are going to be manifested to shareholders. So we're really excited about it. A lot of hard work is taking place right now, and we're very optimistic of where we're going to be in not too many months from now. So happy to discuss further.

Sean, maybe you can elaborate a little bit on the CATSA contracts, the big contracts that Nanalysis was able to obtain, as to how that evolves and when it will become -- when it's going to be -- when is the contract and the execution of the contract is going to be on full speed?

Yes. So as many of you know, we signed the contract on May 25, 2022. And in the contract, it says that we had to get to full operations in 12 months. But we set an objective for ourselves to do it between 6 and 9 months. And so I'm pleased to say that we are on schedule for that. As of November, we have started to service several airports in Canada under that contract, and we expect that contract to be cash flow positive in March. So approximately $3 million is going into ramping that contract up, mostly in the form of hiring the service people and doing the associated training of those service people. And the contract entails providing service for all scientific equipment in 81 airports in Canada. So things like having the employees with the appropriate security passes and those kinds of things also are part of the contract. It's quite a lucrative contract. Once we get to the maximum billing -- and we won't be to maximum billing in March. The project will be cash flow positive in March, but we won't be to maximum billing in March. Maximum billing rate will be approximately $29 million per year. So I expect to be close to that maximum billing rate more towards the end of 2023. And at that maximum billing rate, we expect to be able to operate it at -- fairly lucratively. I've been saying 15% to 20% EBITDA margins, but I'm actually quite optimistic that we're going to be able to do better than that once we get to the maximum billing rate, a part of it. And then it's a 5-year contract. So you can think of it as $29 million per year for 5 years. So a lot of stability in terms of cash flow there for our company, take away some of the lumpiness that tends to exist in capital equipment sales. And to the extent we're able to operate it profitably, then it will be able to fund other aspects of our business, like R&D which we currently capitalize. And so -- and future acquisitions as well. So very happy about the contract.

So Sean, talking about cash flow. Another question that was e-mailed in is, when do you expect to turn to profitability?

Maybe I'll let our CFO, Randall McRae, talk about that a little bit.

So, I'll -- as I said yesterday on the call, I'll call your attention to our income and loss from other items on our profit and loss. If you look below the line, the majority of those items are noncash items and/or one-time nonrecurring items. So you can see for the 6 months ended that the sales rates we were at, even with the costs incurred to roll out CATSA, we're actually very close to breakeven. Now once the CATSA project -- as Sean said, we expect to be able to operate it. Our target is a minimum of 17% to 20% EBITDA margins. Once that's fully operational, we do expect to be profitable. That's our target.

There's a question typed in here. Sean, when is the company going to boost sales in Europe? Are you monitoring public tenders in Europe? Things like such as airports and public health? And then other -- beyond that, are there any kind of partnerships going on for penetration in Europe?

So with regards to the security service business, our strategy is to succeed with the current contract and then start to go to markets like Europe and bid in those markets with the Canadian government as a customer testimonial. We are bidding on contracts in the United States now for -- in the Security business, and we expect that to continue to ramp up slowly. But with regards to Europe and other parts of the world, we're not quite ready to expand there yet to the Security business. We do, of course, sell our benchtop magnetic resonance products in that market. We sell in places like France and Germany and Switzerland direct. And then in markets like the Nordic countries and U.K., we sell through a network of dealers. To be honest, I don't think -- I think we've done an excellent job of selling in the United States. I think there's room for improvement in Europe. And so we're going to expand our direct sales presence in Europe. We seem to be able to do better with direct sales or sort of a hybrid model where we have direct sales and channel management and a distributor in a particular reason. So we're probably going to expand the direct sales part of our organization in Europe. And the recent acquisition that we did of the Swiss company, Quad Systems, which also sells higher-end magnetic resonance products, will be part of that direct sales strategy going forward. We've just hired an additional sales rep out of Germany, and so we'll continue with that trajectory.

Another question I've received, Sean, and maybe you kind of hybrid this, is, can you give an update on the Bosch project or partnership announced a while back, and then maybe potential other partnerships in the same kind of vein?

So to a large extent, during the pandemic, our business kept marching forward, but the one area that did suffer was the partnership area, especially with big companies. And we had 2 partnerships in particular that were affected by the pandemic, where the large companies just had a change in priorities, right? And one of them was Bosch. And so, that project is still alive. The agreement is still in place. But the activity has stalled. And so, we've continued to try and resurrect it. But I don't have any more information in -- about that yet. As soon as I do, I will communicate it. We, of course, are looking for new opportunities as well. And just recently, we had an opportunity to talk to a new partner that will take us deep into the food and beverage vertical. And things are looking good there. I can't talk about specifics, but it's a very old Swiss company that sells all around the world to customers like Nestle and Kraft and so on. So really excited about the potential to take our magnetic resonance -- our benchtop magnetic resonance products deep in certain verticals, including food and beverage with this particular company that I hope to be able to talk to. My target is before Christmas. But if not, it should be shortly thereafter.

I'll read another question here. Sean -- maybe this is for Sean or Randall, both of you, but, is there any danger or risk on the supply side to meet sales expectations in 2023?

Randall, would you like to take that?

Sure. I think we have to look at 2 pieces of the business there, and I'll speak to security services first. That's a people-driven business and a major part of that is our airport security contract in Canada. So we're hiring effectively there. We're -- as Sean said, we're on our target plan right now to roll that contract out. And there's -- there are inventory components to that contract, but the bulk of it is service related with our labor force. So that mitigates some supply risk for inventory management. The other thing I'd point out is, over the last 9 months -- well, 9 to 11 months really, our Board actually gave us the directive to mitigate supply chain risks by increasing our raw materials inventory level. So if you look at our balance sheet, you can see we significantly boosted raw materials over December 31, 2021. That was very intentional and designed to mitigate any risk as we go forward. So we're still carrying a reasonable amount of raw materials, particularly critical components for our benchtop NMR that we've gone and sourced to make sure that we have enough on hand, given long lead times that we are seeing in some customers -- or some vendors, excuse me. Now I will say ,that seems to be easing for our business in the last few months. And so, we're monitoring that closely, and we're making sure we're not overstocked. But there are key pieces that we found throughout 2022 that we had to maintain very close eyes on, and I think we've done a good job at that.

[Operator Instructions] I do have another question. Sean, Please go ahead.

No, go ahead.

So, Sean, the other one I have is will Nanalysis need to raise capital to finance future growth?

No. We're focused in on making the value we put in place, manifest to shareholders. And as you heard Randall talk about during the earnings call that was replayed, we have ample cash. We have potential to get to cash flow positive and we have ample credit facilities both in terms of interest-free loans from -- unsecured interest-free loans from the government of Canada and also a large credit facility through our commercial bank. So the plan that both Randall and I have articulated, which is to get the company to cash flow positive middle of next year, that's the plan. I'm not outraising money now or anything like that. Now, if you mean in the future, like when we decide to resume acquisitions and buy companies in the human medical imaging part of our business and that sort of thing, yes, of course, our strategy hasn't changed, and acquisitions and raising capital in that context hasn't changed. But for the time being in the current context, we do not have any plans to raise capital.

Again, I'll open the floor for any more questions here.

Maybe what I'll do is, until you get another question, I'll talk a little bit more about the Swiss acquisition. The company is called Quad Systems. And I think many of you know this, but perhaps there's some new investors on the call here that don't. So in March of this year, we announced the acquisition of a company called Quad Systems, which also makes magnetic resonance products, but for a different part of the market segment. And our benchtop products have a price range of USD 40,000 to USD 150,000. And the Quad product line has a price range that sort of goes from about USD 150,000 up to anywhere to USD 2 million. So it's a higher-end product. Part of the products are a shared technology platform. And in fact, that's how we started working with this company was, we got a contract to create the electronics and the software for their product. It's the same electronics and software that's in our benchtop products. So there's technology synergies, and it allows us to analyze human blood and urine as well as large complicated proteins that is very important in virology research and so on. So, we weren't very successful at going after those types of biological applications with our small benchtop products. And now we are going to be able to go after that part of the market with the products from Quad Systems. The company has started to do demonstrations and started to generate sales. And I mentioned during the call that we did about $300,000 in sales in Q3, and we have a realistic target. It's not guaranteed yet. We might end up with some difficulties on the revenue recognition side on December 31st, but we have a realistic target of doing $1 million in sales with that company this quarter. And then, we feel like there's tremendous growth potential in 2023 and, of course, 2024. And it's the long-term growth opportunity with that company that -- which is why we acquired them. So that's a little bit of color. I'm headed to Switzerland right now, and I'll be participating in customer demonstrations with Quad Systems in Zurich and also in France, by the way, where we have a demonstration lab as well. So a little more color on that acquisition.

So, Sean, here's another question. What's your view -- and again, I'm happy to get some color here too from the Investor Relations side. But what's your view on the hit that the share price has taken in the last few months?

Yes, I'm disappointed in it. I think when the broader market started to go down, I think, for a couple of months there, our stock price held up pretty well, but then it did sort of turn over. And yes, I've been disappointed in the stock price. I have to admit that. I know our Board also has not been enthralled with the stock price. So my best sort of estimate of what happened is, there were enough shareholders out there that, number one, kind of got spooked by the broader markets that -- they feel like there's going to be some major negative event in the broader markets. So they got spooked a little bit on that. And then secondly, I think, there was just too many people out there who believe that we had cash flow problems and that we needed to raise money at a lower price. And so, they decided to sell. I haven't encountered anybody who's admitted that to me, but that's my speculation. So I've taken every opportunity to try to communicate to people that we're staying the course, and we have the ample resources to get to cash flow positive. And I think that started to help recently as the broader markets have -- has stabilized to some extent. We still have a lot of long-time shareholders, people that have held our stock as a private company since 2009. Most of those people that wanted to sell were able to in 2020 and 2021 and so on. But there's still some of them, and I think a few of them decided to take some chips off the table. There's one more reason. The first company that we acquired, a company called RS2D in France, in March of 2020, a significant part of that was paid in stock. And initially, the stock was restricted. And the founder of that company is no longer with us. He's 72 years old and he retired. But recently, a significant amount of that stock has been unrestricted. So -- and not that many shares, about 1.5 million shares, which is probably all gone now. But I believe that he started to sell his stock a few months ago because the restrictions came off on it. So I think that's probably one aspect of it as well.

Yes. The only last piece that I would add to that is that, I do know on the U.S. side that there were some investors harvesting tax losses. So if -- many investors had gains in early 2022. I've spoken to a few investors who, if you sell here, you can obviously record the loss, use that for your taxes in 2022. These investors can wait 30 days and come back into the stock. So I do know there was a few transactions like that.

[Operator Instructions] Sean, I'm not seeing any other questions here.

Okay. Go ahead. Sorry.

We appreciate everybody's support and everybody participating here. I hope this is a good forum for everyone that works out. And Sean, if you have any other kind of closing comments?

I'm in Europe on a regular basis. I think, I just saw many of you people a few months ago in Belgium, and any opportunity I ever have to do that, I look forward to it. Guido, like I say, is on the call. And so, whenever I have a Director that's supporting me on these things, I always like to make sure that I -- so, Guido, are there any things that you'd like to say? Are there any more questions that you have for me and...

No, I think you covered most of it, Sean. But I just want to emphasize that, as far as the big CATSA contract is concerned, people have to understand that we have to hire many, many people and have to train these people. And so, this is a very significant investment into future revenue. And so, this revenue will only be like maximized maybe in the second quarter of next year or third quarter of next year. But the reality is that at this moment, there is a bit of a cash outflow because we have to train people and we don't get revenue on the other side. So please keep that in mind. I just wanted to make sure everybody understands we have to hire well over 100 people, I think, Sean, if I am not mistaken.

Yes, 120, and we're about halfway there.

Yes.

Thanks for that, Guido. I do want to emphasize to everybody that we are having an excellent fourth quarter. So historically, our fourth quarter has been our best quarter of the year. And the visibility I have is that this year will be no different. We're seeing strong sales on the benchtop side. As I mentioned, we'll see strong sales on the Quad Systems side. We will have a significant revenue from this CATSA contract. So, from my perspective, the business plan that we're executing, is working. So thanks to all of you for your support, and I look forward to continue having you as partners as we take this business to where we want it to be.

Okay. So Sean, we actually did receive another question here, if you don't mind. Is another contract realistic in 2023 and 2024? And I'm assuming this is in reference to any of the service contracts, but I'll leave it there.

Yes, it is. As I mentioned previously in this call, we do have some fairly large opportunities in the United States. And we've actually had to put the brakes on those a little bit just because the CATSA contract is sort of all consuming between now and March. But we will start to work on those opportunities in the United States soon in 2023. But that -- yes, in the time frame that you mentioned, 2023, '24, absolutely another contract -- like another major contract is a realistic possibility, for sure.

Okay. Thank you, Sean.

Okay. Thanks, Guido, and thanks to everybody else for getting on the call. It was a pleasure speaking with you today, and I hope you have a wonderful evening in Europe.

Thank you. Okay. Bye-bye.