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

Good afternoon, everyone.

Good morning here, Sean, and good afternoon.

Hi, Matt. Has Randall joined us yet?

I've not seen that yet. While we have some people on. Obviously, the goal here is to have a Q&A session, especially for a lot of our shareholders and stakeholders around the world, right, or the globe. Obviously, having a large continuity in Europe. I'm not seeing a ton of people on this call right now. But the goal here obviously is we want to provide access to Nanalysis management for questions and answer because of our -- the timing of our earnings call, right, yesterday at 5:30 Easter. So these calls have been fairly informal. And we do invite anybody to ask any questions. So with that, Sean, do you want to give any sort of brief overview? Or should we dive right in to any sort of questions anyone may have?

I don't mind giving a brief overview from my perspective. So thank you, everybody, for joining the call. I guess I want to acknowledge that at this point in time, I understand that our financial statements are difficult to understand. For a company of our size, there is significant complexity were associated with things like we used to consolidate quad systems in our financials because we had 43% ownership and an option to buy the remaining 57% and now we've de-consolidated cloud from our financials, other things like how we've treated the expenditures associated with ramping up the CATSA project, those types of things. So if you feel like they're complicated, you're not the only one. I just wanted to share that. And I know Randall will maybe comment on some specifics, especially if there's questions, but I just wanted to acknowledge that. And so the way I look at our business, not from the accounting perspective, but from my perspective, as a founder and the person who has a vision to take the company to an important place. The way I look at it is, over the last 2 years, we've raised a lot of money, some of it, thankfully, from all of you in Europe. So we've raised a lot of money. We've done several acquisitions, and we've made very large investments in our company. Over the last several years, we've gone from approximately 50 employees, 50 to approximately 250 employees. Right? Our revenue has gone from a run rate of $8 million per year to a run rate of $28 million per year and growing. Right? And so a lot has happened. And we're at a point now where we feel like we're close to harvesting all that hectic activity, all those investments and all that growth. And so we have 5 business units. We have our original benchtop NMR business unit. We have our high-field NMR business unit through the investment in Quad Systems in Switzerland. We have our medical imaging or MRI business unit. And all 3 of those share a common technology platform and a common manufacturing capability. And as I've mentioned, the fundamental math and physics associated with that technology is also common, even though the target markets and the product families are slightly different. And then we also sell third-party equipment through our subsidiary K'(Prime). And the strategy there was to grow our sales force, not just for that group, but for all 4 of these groups. And then we have our new services business, which was sort of unexpected. It wasn't part of the original plan. It was an opportunity. When the government of Canada came calling and said, hey, we want to sign a $160 million contract, which could very likely turn into a $480 million contract. We decided to do it. And that was a deviation from the original plan. And the original plan would have been like, for example, when I met you the first time in Belgium and Netherlands in May or June of 2019, right? So that's kind of what I mean. So that was a deviation, but we decided to do it because it was an incredible opportunity. And it was going to grow a large service organization for the products business. So each of these five business units today is either breakeven or we're close to breakeven and Randall and I are trying to figure out what to do to make it breakeven in the short term. Cut costs a little bit more, talk to our partners to ask them to pay us for some of the resources where in the past, we wouldn't have so both on the top line and the bottom line, we're trying to make adjustments as is necessary to the parts of these 5 business units that aren't breakeven or cash flow positive today. The biggest accomplishment of our company since the last time I spoke to you approximately 3 months ago, is that this business, this unit here, the services business has gotten to the point where it's breakeven or slightly positive and every week that goes by, the gross profit gets better. And this is the one that has consumed most of our cash, our unencumbered cash over the last year. That's been the biggest problem, and we've solved that problem not just solve the problem, but now it becomes a cash generation opportunity for all the other groups in our business, which have R&D associated with it and so on. So I'm very proud of that accomplishment. It's been extremely difficult. Our work is not done, but I feel like we've done a lot of positive things in 2023. And I have strong conviction that all the hard work we've done so far this year is going to pay off in the current quarter, in other words, Q4 of 2023. In terms of revenue, in terms of how you see our cash burn and then that's going to continue possibly with some quarterly lumpiness in cycles. But overall, it's going to continue in 2024. So that's how I analyze our business. That's how I think about our business and unfortunately, that type of, what I would respectfully submit as clarity maybe isn't fully manifested itself yet in our financial statements. But each quarter that goes forward in the future, there will be more of that type of clarity in our financial statements. So those are just some opening remarks about how I think about our business and how we've performed in 2023. So any questions or comments or would you like to hear maybe from our CFO. It's up to you. I don't see Valter on the call. Usually, he's the one that kind of leads with some questions. I believe Valter is in Spain right now, if I'm not mistaken. So maybe that's why he's not on the call. But anyway, anybody else with some questions?

I'll jump in here maybe and do a quick update on the CATSA project at a bit more of a technical level here and see if that sparks any questions. So CATSA in Q3, it's a particularly busy summer travel season here in Canada. So we -- at the request of our customer, we slowed our rollout. We didn't completely stop but we slowed our rollout. And that's the primary reason for your -- for the flat revenue. Now revenue mix did shift a little bit in Q3 in a positive way, and that's part of the reason why the margin improved quite a bit versus the second quarter. But we shifted that roll up and we took the time to plan for the fall here. So what we've done so far in the fall has been really dramatically accelerate that rollout. As you saw with the end of the -- or in the press release and the MD&A, we are at about 76% covered. So what that means is, we've got currently -- since the second quarter, we've had people in every single required airport in Canada. But we weren't covering all of the services required of us yet in the contract because we didn't have quite enough people in every single location. So over the course of the -- not so much in the summer, but into the fall, we started to fully take over a number of airports, including some of the biggest airports in Canada over the last several weeks. In the upcoming weeks, we're going to ramp that 76% up to 100% coverage, and that means we're going to be handling all preventative maintenance work at these airports, all break fix maintenance work at these airports and be fully staffed and ready to take on what our client are first to as additional projects. So those additional projects are part of the $160 million budget, but we haven't done a whole lot of them yet because we've been focused on getting that baseline coverage. The nice thing about that baseline revenue is, that's a significant amount. That in and of itself is good for the project. But we want to get that, we want to get extra margin, we want to get extra sales off of doing that additional work. So that's kind of the next phase after that. So it's been quite successful over the fall here. We're still tracking on our targets really nicely in terms of both revenue and timing. We're dealing with some of the training issues that we've had earlier in the project seems to be slowing. Of course, there's always hiccups here and there, but we've been able to work with our OEM partners and get those training courses rebooked. For instance, we had a situation where a hurricane actually interrupted one of our courses and had to rebook that one, but we've been able to do that and are at a point here where the training piece is starting to wind down. We're largely through our security clearance piece and are ready to kind of finish that last stage of the rollout here over the upcoming weeks. So feeling really good about that project. We should start seeing some nice numbers coming out of that here in the fourth quarter and then growing that under Sime Buric our new Executive Vice President in charge of that division into 2024.

Randall, could you expand maybe a little bit on that training piece, meaning -- and we talked about this on the other call, I just want to highlight it, and you just highlighted very briefly there, but the idea of -- I mean that's been -- has that been a big heavy piece of this and what that does to -- in a sense the expenditures for that contract and how that helps kind of the shifting, right?

Yes, that's a great question. So it's kind of twofold. It hits us in a -- it's -- we've got 130 people to train, 131 to be quite precise. And we've got to train them on a variety of highly technical equipment. So we're talking about having to send them to courses all over North America and have them trained for at least a week at a time to be certified to maintain this complex equipment. So it's a heavy expense burden, both from a travel perspective and from a course perspective. Now we have -- we've done a good job with our partners in getting through that training. But with 131 guys to train, it's timing and it's a lot. And remember, we're not the only country that has airport security equipment -- and we're not the only maintainers who have to be trained by these OEMs. But they've done a good job getting us through giving us priority because of the number of people we are training. Once we trained up everybody, then it's about maintaining that certification level. So if we have turnover, we're going to have to train some new people. But it's going to be a fraction of that because we're obviously not expecting to turn over 131 people in a rapid time frame. So that's going to come way down and just become part of our normal operating cost. Now part of the challenge with the accounting is under the type of contract this is IFRS would have us capitalize our wages. So you can see we've capitalized a couple of million dollars of wages that onto our balance sheet rather than expense them because we were to basically match those wages with the cash flows of the contract. You can't do that with training. Training is expressly prohibited. So this big multimillion dollar training hit has gone right straight into our P&L in this first year. So it reflects the true cash outflow, but it doesn't really match those expenses with the value generated from the contract. And that's a function of international financial reporting standards that we can't change but we should -- that training comes off, that's a significant expense burden out of the project right away. So if you were to amortize those trainings out over the 5 years of the contract, it gives you a very different perspective even of this first year.

Maybe expanding a little either to you, Randall, or Sean. I mean, having this trained force, right, what does that look like for our prospects of, I guess, potential other business?

Yes. So we've got 131 people across Canada who are highly technical and highly trained in maintaining sophisticated equipment. So for instance, one of the OEMs has come to us and we're working with them to potentially be their maintenance arm because they look at us and they say, hey, you guys know you know what you're doing, you know our equipment. We need this, we need help with this. And so this allows us to say, okay, well, anywhere else that these guys are working in Canada, we've got boots on the ground effectively or within very close reach because our labor force is spread across Canada. So in the contract itself, we should have sufficient capacity with our team to actually take on additional work. When you look at the expected utilization rates for our technicians. There should be more time. Now this may depend airport to airport depending on how busy particular individuals are, but we've got capacity. So there's room to add additional work within the country or even within short hops from these locations. Further to that, we've got a basis that allows us to expand into other countries. So we had to do it for presence in the U.S. We've got relationships with large U.S. OEMs and are optimistic that we can add some additional security services work outside of Canada as well.

Great.

I see good prospects. This is not a -- this is an industry that is only increasing in its sophistication and its size. The security services industry in this world. So there's a lot of opportunity for us in this segment of our business.

Great. Are there any -- a few people on it. Any other questions out there? Okay. Well, I mean, I think our last call was a little bit quiet. So if you haven't -- Please, Sean.

Yes, I'll make a few more statements. And so most of our European investors became shareholders of Nanalysis around the time when we went public in mid-2019. And at that time, while I did talk about acquisitions, mostly I talked about our benchtop NMR systems, which are essentially MRI devices for the applications of not medical applications, but food companies, pharma companies, chemical companies, determining what molecules are in a new drug being developed or something that they want to do quality control on. So the math and the physics is the same as MRI, but the actual application is referred to as spectroscopy. And so I talked a lot about that product line. And so since then, we've expanded and improved upon that product line. And then we were doing very good growth with that product line. And then two things affected our growth trajectory on that product line. The first thing that affected it was the pandemic, which we've kind of all forgotten about now, but for a while, it was a real thing. And then the second thing that happened was when we made the acquisition of this company called K'(Prime), and then on this large contract, we had some disruptions to our sales organization and our sales ecosystem for that benchtop NMR product line. And we had some serious execution problems, starting in middle of 2022 and lasting all the way until first or second quarter of 2023. So the changes that have occurred there have been a 100% replacement of the sales reps in that organization. In addition to several partnering companies in the United States that work with those sales reps and a new VP of Sales that we just announced, Nick MacKenzie, who's been with us during this whole time, so he's not a new person coming from the outside, but it's a new role for him, a new leadership position. And there are some other changes that we've made in what I would call the fundamentals of how our sales and marketing organizations work. So I'm confident that those changes have turned around our sales organization and that there's going to be benefits going forward. And you'll see those benefits in Q4 and then what it will really do is because we've had positive quarters in the past, but we haven't been able to maintain that consistency. What I believe is going to happen this time is you're going to see that consistency and stability and eventually growth because of all these changes that have been made. I know a lot of the investors that are in the United States and Canada, when they talk to me, they like this CATSA contract. They think it's a good thing because of cash flow generation potential. But what they really care about is our proprietary technology and our proprietary products. And they want to see returned to growth to that part of our business. So I suspect that the sentiment amongst European investors could be similar to that. And so we worked very hard to address that deficiency in our business that crept up over the last couple of years. So I just wanted to make some comments on that since there was no questions, and I'm just trying to anticipate what maybe questions would be post. Maybe if I spoke Dutch or something like that, and I apologize that I don't. I do speak French. So if anybody wants to ask me a question in French, I'm happy to provide an answer in that language.

Well, I'm not -- at this point, I'm not seeing any other questions. So I mean I appreciate everybody attending. I appreciate, obviously, Sean and Randall, thank you so much for doing this, and we'll continue to do this, to try to offer up as much access to management as we can.

Thanks everybody, for join for joining excuse me.

Yes. Okay. And I also want to mention that, I mean, I'm sure I'll speak to you sooner, but I'm also scheduled to present at Brex Safe Capital event in the spring. And so I will physically be I think it's in Ghent, I'm not sure, but some place like Ghent and I look forward to presenting to that group and speaking to Brex and all the others that attend, just like I do every year there. So again, just to echo what Matt has said, thank you very much for your time. I really appreciate it, and I look forward to speaking with you again.

Thank you, everyone.

Thank you. Have a wonderful afternoon and good evening. Bye-bye.