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

[Starts Abruptly] [Audio Gap]

...as well as growing our revenue, we're not at the run rate we want to hit on Security Services on our major project, and we've got some runway we believe as well in Scientific Equipment. So, I think our goal this year, as we've said many times, is to get EBITDA positive company-wide. So, that's the gameplan, and we expect to do it in 2024.

Great. Are there other questions? Again, everyone is welcome to put a question into the chat icon, type 1 in. You can also come off mute and ask a question.

It's [ Mark Wheeler ] can I ask a question? I'm sorry about blacking out my screen. I just got back from a run, so don't see me in my sweaty t-shirt.

We can hear you loud and clear, Mark. So, please go ahead.

Wonderful. Well, a couple of things. First of all, could we talk a little bit about the future of scientific instruments and what the demand is and what you're doing to build that out? I don't know how many units you sold last -- I'm sorry, I'm coming to the table a bit late. I didn't see how many units you sold last quarter. But could you give us some ballpark, I don't know, whatever, some framework about what to expect there and additionally when we're going to start seeing significant revenue from some of the European initiatives.

Mark, so on the Benchtop NMR side, the main thing that we've been focused in on over the last year is execution. We had some hiccups there, and we feel that we've corrected those problems and are now executing correctly with our sales organization and some of our marketing initiatives. And if you look at our Q1 numbers from 2023, we've done almost 100% year-over-year growth on the Benchtop NMR side for that. So, it's still not where we want to be, but it's evidence that we've fixed some of our execution problems. So we expect to continue to see our execution bearing fruit on the Benchtop NMR, and I see strength throughout the rest of the year. Demand is good, and we're going to have a great 2024 in Benchtop NMR. In addition to just executing well, we've got some product enhancement initiatives that will be released by the end of the year that harvests some of the R&D successes that we've had with one of our products and then applying them to another to give us some higher-performing models at different price points. And then lastly, we've got some exciting partnering opportunities that we're pursuing and that to some extent are relying on some of these performance enhancements that we've made. And so [Technical Difficulty] an announcement that would be, say, vertical market centric would be that it would provide a significant step-up in revenue beyond our baseline growth that we're experiencing now with our own sales force and our own dealer network. Our current dealers aren't really value-added resellers. They're just classic dealers that mark up and sell under our brand. So, that's what's going on the Benchtop NMR side. With regards to your questions about other "European initiatives." One of those initiatives I would refer to as through an investment in another company, and that's called QUAD Systems in Zurich, Switzerland. And we own 43% of that company, and our technology, which is the electronics and low-level software, is a major part of their overall high-field NMR offering, which targets a different segment of the market than our Benchtop NMR products. And that company had some delays in getting a product to market, but they do have a product to market now. As I mentioned on the call yesterday, there's 5 installations with paying customers. And so we're using them as testimonials, and we're building on that together with QUAD Systems. The product is sold under their brand, and they're the driver of that business unit. The founder of that company, Dr. Klemens Kessler, is a world-renowned expert in various aspects of high-field NMR. He worked for the incumbent provider in that space for almost 20 years, so very well known and very well positioned for that initiative to be successful. We have been a bit disappointed in terms of the revenue that has come from in the past. Again, classic R&D delays are the main reason for it. But we're optimistic that that's going to improve. So in that investment and that revenue potential right now is -- when you hear us talk about becoming EBITDA positive and the solid growth that we're experiencing, we're actually not [Technical Difficulty] our numbers at this time. So, when that initiative starts to become more successful, we'll revise how we think about our future revenue. So, we're not relying on that to accomplish the things that we've been saying publicly that we're going to accomplish. And then the other one that you probably are referring to when you mean European initiatives is we sell medical imaging related products, both our own proprietary consoles on a standalone basis, which is again the electronics and the low-level software that's in all of our product offerings, including the high-field one through QUAD Systems. And that continues to be a stable part of our business. As I've stated many times in our calls, it's not a large part of our revenue right now. It's probably been about CAD 2.5 million trailing 12 months revenue. So, it's significant, but it's not a major part of it, and we expect that to continue forward. There's a lumpiness to that part of our business. So, for example, in the quarter that we're currently in, I expect there to be a couple of large lumps that show up. And then other quarters like sometimes they're not there. But the strategy there is to continue to incubate the medical imaging side of our business and to leverage our core technology to stay active in that area. There's a lot of exciting scientific projects that we work on that we generate positive cash flow from, but we don't book any revenue from them. They're considered netting against other expenses. For example, a project in Europe called the Gamma MRI project, which is using hyperpolarization to make MRI more sensitive so that you can detect smaller tumors earlier. But, yes, when you think about our business, you should think about our 2 core businesses, which is the Benchtop NMR and the services side of our business. Mark, do you have any more questions to follow up there? Did I address your questions correctly?

Yes completely, Sean. I was going to ask just another quick follow-up question on the service contract. I think you're billing something about like CAD 1.5 million a month. Is that about right? You're somewhere in that neighborhood right now?

For 1 component of it, but there's an additional element on top of that. But maybe I'll let Randall comment on that. And Randall, I think, not only what Mark's current question was, but also implied in Walter's email. There's a lot of interest from shareholders in how you see the revenue in the CATSA project evolving as we move forward. And specifically, if we're already deployed, why isn't our revenue at the maximum run rate already? That's I think part of Mark's question but also part of Walter's question.

And let me just pop in just for 1 sec, just one thing. And what do you expect your eventual margin to be if you could address that as well?

Yes absolutely. So, I'm targeting a net income after-tax margin of 20%. That's our that's our target margin. So, EBITDA will be a little bit north of that, of course, with tax, depreciation, and what have you being added back. So, you're right Mark, we're at about CAD 1.5 million run rate right now. We just finished taking over and getting the incumbent out of there. So, there's still some transitory matters we're dealing with. Last couple years was all about getting 130 people hired and trained, which was a project that even the government in Canada was sitting going, holy cow this is a big undertaking, and it was. So, it was really about getting it done, which we did. Now we want to drive efficiency in that. And that's going to come from a few places. Some of it's going to come from internal operational efficiency, and then the other part's going to simply come from people getting more experience under their belts because, of course, when you are brand new you're not going to be working at the pace that you will, say, 6 months in or 1 year in when you've got a lot more hands-on, on-the-ground experience dealing with the equipment, dealing with the circumstances, dealing with regular versus irregular repair. So, we're expecting the techs themselves to continue to get better and better as they go, which will allow us to effectively complete more jobs in any given time frame. So, there's a there's a little bit of that happening and then there's, of course, back-office efficiency, which is just about scheduling and getting everything running as efficiently as humanly as reasonably possible. And then there's also just simply taking on more projects. We know there's new projects coming down the pipeline from the customer, so we're trying to get ourselves ready for that. And that's going to allow us to get to that run rate, which we want to see hit CAD 2 million-plus on a monthly basis, excluding the flow-through parts revenue. The flow-through parts revenue we sit back, and we say, okay, we're not really forecasting on that piece because we know it's 0% margin anyway. We're focused on our service operations. So, that's what we're really looking at driving us to CAD 2 million before parts revenue.

That's very clear, and I'm happy to hear the margin number you quoted. That's great.

Yes. That's a pretty industry standard for, I think this type of project, Mark. So, we're pushing for it. I will caution that this project has never been undertaken by a private entity in Canada. So, we're basing it off of industry standards and metrics, but that's certainly our target.

Can I ask a question?

Yes.

What's your utilization rate of your service people? Could you add another project, because you were talking that maybe you could have a maybe not another CATSA project but from a smaller size? Could you do that with your present people, or would you have to add another 100 people?

Well, I would say that depends on project, if we'd have to add another 100 people but a smaller project. Yes, generally speaking, Walter, yes, it would depend on the location. So, there's a variety of sizes of airports in Canada, and in some of the major airports our teams are scheduled 24/7. But in some of the smaller centers, there's certainly capacity to take on some smaller projects or travel to bigger centers and do projects. So, we're still looking at that as a very viable option for our teams to be able to generate more revenue. On average, the utilization rate will allow for that.

And you're talking about positive EBITDA for this year, possibly. And what about net income? Is that also in the possibility because you're still making losses like you have CAD 300,000 EBITDA but CAD 2 million loss. What do you think about that figure?

Yes. Getting to positive net income this year it's on our radar, but it isn't necessarily our top priority. We're looking to drive to positive EBITDA, then positive cash flows first. One of the things that drives our net losses would be significant depreciation and amortization of very large intangible asset portfolios that we have. So, while we still maintain a strong R&D portfolio to ensure that our R&D is up to date. The accounting depreciation is best meant to match the use of those assets, but it doesn't mean that the net income from selling those products would stop if those assets are fully amortized out. So, I think, I look at that net income measure, and I always remind myself, there's significant non-cash charges that go to driving that to a loss. Having said that, to your point, once we achieve the former goals of the EBITDA and cash flow, absolutely, the next domino to fall would be working towards net profits.

Sorry, Walter, did you have another question? You broke up a little bit there.

No, I have no more questions.

Yes. Were there other questions? And again, feel free to come off mute, send 1 into the chat.

I don't think so.

I'm not seeing any others as of this time. I guess the only other commentary I would give is that, to add on to what Sean mentioned earlier, is that what we are seeing now is the benefits of our diversification. We are really seeing ourselves as a diversified scientific instrumentation company, and you're hearing the different areas of the company hitting stride, and we're very excited about that.

So where are you getting costs at the moment? That's another thing which I was thinking about.

Great question. Randall, do you want to take that one?

Sorry, broke up for me a little bit, Matt.

Where are we cutting costs? We talked about we're continuing our cost-cutting initiatives, and if you could just give some color. We've done some -- obviously, we've we already enacted some, but could you talk about where we're still going with that and those initiatives?

Yes. So, we went through some labor reductions in Q2 as well, and we're looking towards consolidation of some of our departments internally where we feel that our employees can be more effective working together as opposed to in separate departments. We're also looking heavily at our overheads, so doing what we can to minimize overhead charges to really scrub through all of our expenditures and make sure everything that we're doing is adding as immediate a value to as possible to the company in near term to drive towards positivity.

Yes. Walter, there was significant cost synergies to be had based on the acquisitions that we did. For example, some facilities that are no longer required and are being closed down and subleased, as an example. Before, when I was speaking, I referred to as reduction in R&D expenses. So, Walter, there was a time where 100% of our budget was spent on R&D, right? And that hasn't been for a while, but I'm just painting the picture that we're settling into a classic 12% R&D number in terms of our overall budget. So, that's the other place that we've reduced our costs in. And so we made some significant cost savings in Q2 that were not part of our Q1 numbers, so those will manifest themselves in Q2. And then there's going to be some more cost savings that we achieve in Q3 that won't be part of our Q2 numbers. So, basically, we're not going to stop until we're cash flow positive, and then we'll maybe readjust our trajectory to some extent depending on where we are.

Okay. I just still want to tell you that you were nominated as having the best presentation in Antwerp and in Ghent.

Well, I appreciate that, and I really felt like we had some solid engagement there. I feel like we're a real company with real growing revenue as well as sexy technology and exciting products. So, I view our company as the best of both worlds, right? Blue sky upside based on technology, but also real revenue and sticky recurring services revenue. And I like to think that maybe we stood out in that regard relative to some of the other companies that were there, but yes, go ahead.

Especially the slide where you showed what happened the last 4 years and what was going to happen the next 4 years. I think that was very highly appreciated, very interesting.

Thank you. And we're working very hard on all those items. And Randall, you know the slide he's referring to, right, where on the left-hand side I say, okay, we're going to do these acquisitions, we're going to quadruple our headcount, and so on. And then here's what we're going to. And you know why I showed that, Randall, and, of course, Walter knows this, but about 4 or 5 years ago when I met Walter and the whole crew out in Netherlands and Belgium, they were asking me at that time, Sean, what are you going to do for 4 years? Well, that's today. So, it was basically a recap of what I said I'd like to think that we did what we said we were going to do, maybe not perfectly because we have made some mistakes. But we certainly had the intention to do what we said we were going to do. And the most important thing is now I think we can harvest that and make the value manifest to shareholders. So, thanks for bringing that up, Walter.

Fantastic. Do we have any other questions? Okay. Well, again, at this time, I think we'll wind this down. We do appreciate everybody's support. We do appreciate everyone's engagement here. Again, the purpose of this, too, is to give more access to let -- and this is one of the better calls we've had in the recent history here with engagement, so thank you everyone. And again, feel free to reach out always myself, obviously, we will make Sean and Randall available. We do strive to have open communication with management and the company. So, thank you, everyone. And with that, please have a great evening, afternoon, or continue on with your morning.

Okay. Thank you very much.

Thank you very much, guys. Great call.

Thanks, everyone. Thank you. Appreciate it.