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

Good morning, everyone, or afternoon or evening, depending on where you are. I'm going to wait a couple of minutes here for people to log on. I hope everyone is able to see our results, which we put out yesterday after the market closed. We did host our year-end and fourth quarter call yesterday at 5:00 p.m. Eastern time. There is a replay available on our website as well. Obviously, the purpose of this call is to give access and to give a venue for Q&A for investors that are in different time zones. So Randall will be logging back on momentarily. And then we'll get started and Sean should be joining us as well. And by the way, to ask questions too, there are multiple avenues on this medium here. You feel free to ask a question, feel free to just unmute and ask a question. You can also on the top, you can raise your hand. And again, this isn't overly structured. So we really wanted to just as another method for this communicating with investors. So, with that with...

Good morning everyone.

Yes. So this is Randall McRae, everyone, analysis Nanalysis' CFO. I think we may be waiting for Sean as well. But in the focus on everybody's time, I think the floor is basically open. So does anybody have a question they want to start with? If not, I can -- Randall and I are happy to kind of give a high-level overview, but what -- are there any questions to start this? No need to be shy either. This is really -- we want to give access here to management and to give you an update on the company.

Yes, I'll start here just to warm things up, I'll start with a bit of a recap of our call from yesterday. So we had a good fourth quarter. Things are trending in the right direction for us. We had significant growth in the rollout of our airport security project. So we reached near full rollout in 2023. And as you probably saw from our press release -- good morning, Sean, this is our CEO, Sean Krakiwsky -- we had near full rollout of our project in Q4 of 2023 with 100% of basic services being covered in early 2024. So what that means is we've taken over all of the standard kind of maintenance services required under the contract. And the incumbent service provider is fully out of the contract at this point. So we've fully taken that over. And in 2024 here, we're ready to continue to ramp that up and begin taking on additional projects and work like that now that we've completed that first major rollout over the previous 19 months. On the product sales side, we saw continued recovery after a challenging first half of 2023, which was really the result of both internal sales reorganizations and echo effects from that which happened in 2022 into a challenging market globally in early 2023, where we saw interest rates continually being raised by central banks, appears to have been runaway inflation and global recession, which put downward pressure on our product sales in a number of areas. Now into the second half, those interest rates stabilized. Our sales organization really got its feet under it, having been on board for, at that point, nearly a year. And we started to see really good recovery, particularly in our benchtop NMR sales. So as we went through Q3 and Q4, that sequential recovery continued, and we ended up with a really nice fourth quarter in product sales as well. So all of this led our EBITDA losses to decrease trending towards positivity in 2024. And of course, cash flow is following soon.

And would it be worth -- thank you, Randall, for the overview of the year. And what about -- what are you, Sean or Randall, kind of giving then an overview going into 2024. Kind of what are we seeing already obviously, Q1 is a little bit -- was behind us, right, which we were reporting in a few weeks, probably in a month. But what's kind of the -- what are you seeing now? And what is -- what's kind of the sentiment and outlook for the rest of the year, if you can give as much as you could -- can give?

Yes, I'll start, Sean, and feel free to jump in if you have anything that I missed. But from -- for our Security Services segment, our outlook, it's a very stable business. It's sticky revenue, and it's ongoing. So what we're seeing through the rest of the year here is continued optimization of our labor force and working on taking on those extra projects our customer has for us. We're also, of course, looking at growing that business into the United States and further in Canada, in particular with the existing labor force that we have. So that's a segment that is very stable, and there's a lot of opportunity there. Of course, in our world, security services is only ever increasing. On the product sales side, I think it's going to be very similar as we saw kind of in the second half of last year, where customer challenges are going to be less than they were in the first half because we -- while we still have relatively high interest rates in a lot of countries, they're stable. So it allows for better planning and cash flow planning for a lot of our customers. And so I think fixed asset purchases or leasing is going to be back to -- back on the table from many customers. So we're expecting to see continued activity on that side.

Does anyone at this point have any questions. Again, feel free to raise your hand. There's a button on top. You can just click -- you can bring it off mute and ask a question? There's also a chat icon on the top -- [indiscernible] on the top left. You can do a chat question as well, too.

Sean, what are your thoughts -- oh, you're muted, Sean.

Thanks. Yes. So I think I met with a lot of you recently in Antwerp and Ghent, and it was a pleasure and had a great time. And I'll reinforce the themes that I spoke about at those events is that overall, our costs are leveling off and even going down in some regards, and we're confident that our revenue is continuing to climb. And our objective is to reach the EBITDA crossover point first. I think I showed a nice crossover chart on a slide that I presented to you a couple of weeks ago. And then after we hit positive EBITDA, of course, and we continue to strive for positive cash flow. So that's what our company is all about right now, and we're not going to lose focus on that objective until we achieve it. So it's true we are experiencing some solid top line growth, but we're really getting our expenses and our costs under control after 4 years of acquisitions and quadrupling the headcount in our company and those sorts of things.

Fantastic.

I'll also say that even though we're a full-blown operating company now with just over 200 employees, we're still a tech company, we're still innovating every single day, we still have world-class scientists and engineers, and we'll always be improving our products, building next-generation technology and that sort of thing. It just won't be the lion's share of our company's operations. It will be -- it will constitute sort of 10% to 12% of our company's operations rather than 100% of it, like when I founded the company or 50% of it like it was even 18 months ago or 2 years ago. So we're evolving in that way, just like any company who had success.

Are there any questions? Here we go. We do have one in the chat. Let me read it if I could. Yes, are there any plans to intensify core operations with the German government. I think in this one, especially with the German police, I think there was some talk about a contract in the past?

Yes. We continue to work with a police organization called the LKA in Hannover, which is using our product in mobile labs to drive around and test suspicious white powders. And if you saw a few weeks ago, we also issued a press release about receiving government funding to do AI associated with detection of illicit drugs. That actually is associated with that partnership with the LKA in Hannover, Germany. And we're adding some American partners to the consortium as well, and we expect that to be an interesting application for us going forward.

Yes. And would it be worth giving a little more -- I mean, high level color on that. I'm happy to dive in or Sean, I mean, or even Randall, just talking about what that means is basically R&D funding. Is that correct?

Yes.

Yes. R&D funding of about $0.5 million a year for 3 years to enhance our AI models associated with detection of different types of illicit drugs. And so the basic science and technology for this already works, where the AI and machine learning comes into it is when it's real-world activity with real bad guys, and they use clever ways of masking the illicit drugs with fillers and different types of things. That's when things get a little bit more complicated and that's how we're evolving our technology. Our intention is to have a real street drug analyzer that can be used in the field by non-experts. And we've had -- like I said, we've proven the basic science and technology in this in several instances at music festivals for safety reasons where we've had people there with official groups testing drugs to make sure they're safe for people at music festivals, but we've also done it in mobile labs and real street drug situation. So it's just a natural progression of what we've already developed and it's nice to get some real money associated with that. It's approximately $40,000 a month, which is a good subsidy for us.

And I think you're taking this up a level higher, going backwards, bringing it up a level. I mean, this goes to a theme, Sean, that you spoke about a while back, right, is the amplification, right? Meaning we've got incredible hardware, right? And then the applicability expands as -- again, as different needs or as companies or there's different themes that need to be met and then you can develop software to obviously use on our hardware, right? For also to different applications and we've talked about this before. Here is obviously drug detection. We've talked about, obviously, uses in food, right? Food, food safety, food verification, things like that. So just to give you an idea of, again, I mean, we have an incredible core hardware and that you really get the applications get quite endless in a sense when you can create these different apps or different software, right? To look for specific items. So I think that's the theme here that you'll see us expand on throughout the years.

That's exactly right. Yes, Felix Becker, says it's an Nanalysis app story. Yes, that's exactly right, Felix. Like a lot of hardware companies, once you successfully established a hardware platform, then it becomes about vertical markets and applications. So I actually think that over the next 10 years, software will be just as important, maybe even more important for us than hardware is. When we started the hardware -- our company, we were a pure hardware play in terms of intellectual property, the technology platform. But as we took a product to market, as we've gotten now into our second full generation of technology, now software is becoming the critical part of our IP for the future. So it's like that with a lot of hardware companies, and that's absolutely right. Our growth objectives now are to go deep into verticals, sometimes buy ourselves independently and then other times with partners.

Yes. Fantastic. I know we've got some other -- some other people joined a little later. Are there any -- again, any questions? Feel free to put in chat, feel free to come off mute. Again, this is really meant to be interactive, really trying to give access here to both Randall and Sean for everybody that was enabled to -- here we go. So here's a question. Are there any third-party integrators to create a platform for software integration. And then it looks like this is a company that would like unity for app or game development?

So I think the question is not so much third-party software developers per se, but another entity that would create a platform that might make it more convenient for third parties to create apps. Did I interpret that correctly?

Yes, is what you're saying, yes.

Okay. So right now, we're acting as the platform provider. There's still pretty tight integration between the app and our hardware. So we have to be fully evolved. But I think as our particular industry evolves, this might be something that arises in the future. But right now, we're actually just working with third-party software developers per se, not so much a platform entity.

Okay. Any other questions? Okay. Well, again, we strive to give access to management. That's why we host this. We realize there are different time zone differences, right? Obviously, it's tough for us. We need to, obviously do our calls after the market closes. But again, we always strive to -- again, to give access. We're happy to answer questions as obviously Randall and both Sean are here. You're welcome to e-mail us with any other future questions as well, too. And we obviously appreciate everybody's support. So with that, I mean, Sean and Randall, do you have any -- maybe some closing remarks at all?

I'll start, Sean, if that's all right.

Sure.

My thought -- I was just going to say, we're -- thank you again for everybody for attending today. As Matt noted earlier, we're about 4 weeks away approximately from our first quarter release. So look forward to seeing you all again on this call in 4 weeks, and we'll have some more information to share, a little bit about more outlook on 2024.

I don't see Walter or Brett on the call, but I know that many of you know them. So please say hello to Walter and Brett for me. I really appreciated their events a couple of weeks ago. So as Randall mentioned, I look forward to speaking with you at the end of May. So thank you very much, everybody.

Great. Thank you, everyone.

Thank you.