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

Good afternoon, Walter, and everybody from Belgium and Netherlands.

Good afternoon.

Good morning, Sean.

Good morning, Matt.

Got a few people. Should we wait a few more minutes so you get some more attendance here?

It's up to you. You're the boss.

Randall is on, that's good. Great. Well, thank you everyone for joining us. Walter, it's good to meet you face-to-face. I know we've interfaced via e-mails. I don't know if we've ever -- I think I've seen you on these calls. I don't know if I actually see you on with live camera. So it's a pleasure to see you -- your face.

It's the first time it works for me.

Technology. When it works, right?

Yes, technology, yes. The older I become the more smarter I become in it.

Well, thank you for joining us. As everyone knows, the reason for this, obviously, is to give accessibility to management because of the timing of our quarterly calls. We do want to make both Sean and Randall as accessible as possible, especially after our calls to talk about the results. Does it make sense here for either Randall or Sean to give a high-level overview, at least the numbers maybe Randall, and then dive in to any sort of overview you'd like to give and then open it up for questions.

Sure. I'll start with the financial overview. And then Sean, if you want to jump in after me with sort of a mini version of our intro to the call yesterday. For this quarter, I -- the key I want to highlight are 2 major things -- well, 3 really. New record revenue of $11.5 million, so that beats our Q1 revenue, and we had less flow-through part revenue there as well, meaning higher margins. That resulted in $414,000 of positive EBITDA. So that's one of our big features of this quarter is we've reached positive EBITDA. And then finally, highlight our operating cash flow, so 6 months ended June 30 strong operating cash flow as well. So the trajectory of the business is headed into the right direction, and we're looking forward to see where it goes from here.

Yes. Thanks. In terms of our strategic objectives, we continue to make great progress with our customers, with our products, with our employees. And now we're hoping to have some success with investors and our stock price. So I've received a lot of positive feedback from people recently about our accomplishments. Pretty much everything we accomplished this quarter are things that we told people 6 months ago, 9 months ago, in some cases, 12 months ago, that we were going to accomplish. For example, Walter, I think I met with the 2 groups in Belgium and Netherlands in the springtime. And since then, I'm very happy with how we've executed. And so I'm getting that message consistently from investors, who follow us quite closely. So our plan is just to continue to execute, strengthen our balance sheet, sign some exciting partnering agreements, both in the MRI space, but more importantly on the Benchtop NMR space and take our revenue up another level. So that's really sort of the opening remarks that I have to make. And again, happy to answer any questions or make some more comments.

And if I can just give a couple brief comments. I mean one from the investor side, the big question was when were we going to become EBITDA positive, right? But that was always the question in the past kind of 2 calls. And I think, obviously, last quarter, in Q1, we were just barely a couple of hundred thousand EBITDA negative, right? And so here, we attained EBITDA positivity and asked on the call yesterday was will this continue, right? And Randall did answer, this will continue going forward, obviously, and working towards company full profitability. So I think, again, as both Sean and Randall said, this obviously was a big milestone, which we set and accomplished. So I think -- so we're very proud of that. And we're very proud of what we're accomplishing and there's a lot more to be done, right?

Yes. This is step 1 down the road, reaching EBITDA positivity. Now it's the march towards full cash flow -- free cash flow positivity, cash flow positivity and eventually, net income. But what I'm pleased about with the EBITDA positivity is we're working to build that in structurally. It isn't -- as we said on the call yesterday, this isn't just about growing sales. It's also about managing costs and increasing efficiency. And that's not done, but we've had good success so far in doing that and really getting those fixed costs aligned with where we need them to be so that we are a profitable business going forward or will be a profitable business going forward.

I know everybody on this call follows us quite closely, especially Walter. And by the way, I'm very appreciated to you, Walter, for the time you spend on analysis. Randall alluded to one detail that we didn't talk about too much on the call. But I'm going to talk about it a little bit here because I think for those of you who want to dig a little bit and understand why the numbers look the way they did a year ago or 18 months ago and then why they look better today and then foreshadowing a little bit into the future. And I want to talk about cash flow a little bit. And first of all, I just want to be clear, we realize that free cash flow ultimately is what matters. And so I'm not talking about free cash flow, I'm talking about a clue that maybe Walter, you can look at in a sophisticated way, not a simple way to try to have insight of where we're going in the future. And that's operating cash flow. If you look at our cash flow statement, which I think is Page 5 or something like that on the financials, not the press release, but the full financials. You'll see operating cash flow for the 6 month period of $2.5 million positive, right? And then you'll see the previous period, the comparable period -- and by the way, the comparables are a little bit misleading. So I just want to be clear about that. But it's also an important point. So if you look at the 6 months of 2023, the cash flow was negative $7.2 million, right? So almost a $10 million swing just in terms of the presentation on the cash flow statement. So I believe one of the reasons why our stock price has been so poor if you go back like a year or 18 months is because our financial statements were so complicated and difficult to understand. But today, they're becoming much clearer and more understandable. And one of the reasons for that is the treatment of QUAD systems, right, which -- I mean, I still think it's a great investment. I'm still committed to it. But in terms -- they were a pre-revenue company, right? A pre-revenue deep technology R&D company. So yes, they had a lot of cash burn, and it distorted how our financials looked. But if you focus in on that operating cash flow number in the balance sheet we just released yesterday, you'll see 2 things. You'll see a clue about how our cash flow is going in the right direction. And then you'll also see an example of why our financials are going to be cleaner and easier to understand going forward. And Walter, do you remember that one slide I showed your team when I was in Ghent with the revenue and the cost and the revenue going up. And then I had a title and I said, our financials are difficult to understand, but this one slide will explain what you need to understand about our financials that our costs are going down, our revenues and margins are going up and we're transitioning. I circled the intersection that we're transitioning to EBITDA-positive first. And then eventually, yes, free cash flow to shareholders and positive net income. But to me anyways, as an entrepreneur and maybe to you as a financial professional, if you really contemplate that, that $10 million swing in operating cash flow that we posted, you'll see clues for several important things. And by the way, some -- one reason for that tremendous operating cash flow number was we're managing our inventory better, right? So there's many reasons why that number is getting better, and I don't want to sort of put it out there as a simplistic thing and make claims that aren't true. But it is an important number to contemplate when you compare us to the past and how we are progressing. So there's a little tidbit for this -- for the audience today that I did not discuss yesterday for the North American call.

Very clear.

Maybe it will be -- when we get into Q3 of this year, with regards to the QUAD issue, we deconsolidated QUAD out of our numbers in Q3 of last year. So the 3 months ended September 30, 2024 and the 3 months ended September 30, 2023, are going to be very comparable to each other in terms of the structure of the business. It's -- there's no QUAD in either one of those. So that will start to clear up going forward. But Sean is right. The other piece of that, too, is the way accounting treatment deals with something like our airport security business when we're ramping it up is almost all of it goes to expense as you're ramping it up. There's no -- there's very little capitalization, a little bit that there is in wages, and it goes to prepaid expenses, and we talk about that in the financials. But at June 30 of last year, a significant amount of money was spent ramping up that business as well in that operating cash flow number as opposed to any kind of investment theory even though really, what it is, it's an investment in getting a business up and running, but from an accounting perspective, we don't see it that way. So lifting that to now having 89 airports under our control, fully running that business, and having -- being in fact, busier than we anticipated in that business and generating higher levels of revenue than we had thought contributed to that swing as well. And that's something we think will continue going forward as being busy. That will be a relatively stable business in terms of seasonality, but we actually think it's still going to continue to grow in terms of top line and there's more efficiency we can realize in terms of how we're running it. So we should see margins go at the same time.

So with that, feel free, anyone to answer a question. I know, Walter, you did email us one.

The one question I had is would you consider accepting a similar contract if you had the opportunity? Because in the past, you said maybe we are going to do similar things in foreign countries because we have the expertise now. But would that not have -- would you not have the same issues as before. You have to hire people, train people, go to the same cost and expenditure as you did before. So would you consider to do that? Or is this too early? Like you were postponing additional acquisitions. Is this the same type...

It's too early, Walter. We wouldn't put our company in the same situation again. So we don't anticipate -- like in the, let's say, in the next 6 months or something like that, any large contract opportunities like that, like $160 million or like I like to say, as CEO, it's really a $480 million contract indexed to inflation. But we are taking on smaller contracts, and we are bidding on smaller contracts that can fit within our existing operation. But let's sort of answer maybe like the -- let's put a different spin on the hypothetical. The big difference between our services business today and the services business when we signed the contract was that at that time, our services business had no operations, right? We had a couple of people that were sort of the leadership team. But today, if we had to start -- if we -- and also you have to remember at that time, it wasn't just a new contract, it was a new contract via an acquisition that we just closed. So we had no relationship with the customer or interaction with the customer. It came from the entrepreneur who we just acquired. And some of the entrepreneurs like the one in France, for example, are they're a little bit crazy, and they're no longer with us. So today, we have a fully functioning services business team, which includes Randall, who wasn't with us when we signed that CATSA contract. So we would be much better equipped to take on a big contract like that. We would do better due diligence. We would finance it better. We have a really good track record with our commercial bank now. So there's a chance we could go to our commercial bank and get financing for that contract in a way that was siloed and not with no sort of leakage into the other part of our business. So there's a lot of things that we could do today with an opportunity like that, that we just couldn't do -- we had no chance of doing when we signed the CATSA contract. So again, the answer is we're not going to put our business in that situation again. We will never make ourselves vulnerable ever again. But at the same time, we are growing that services business with new relationships, new customers, and we will be better equipped to do it properly the next time a $480 million contract opportunity presents itself.

Let me -- I'll add to that as well, Walter, because we talked about when we did our offering earlier this year about using some of those proceeds to potentially grow the services business. We are -- to Sean's point, we are looking at smaller, what I would call a tuck-in contract, and we're working towards that, but those would involve, as Sean said, bringing it in with our existing labor force under our existing infrastructure and software systems. So it's more about adding opportunities to generate revenue from that business then expanding the like people footprint or the geographic footprint of that business in the short run. So probably not anything that's going to touch Europe directly in the short run, probably more, I would say, North America, Canadian focused because that's where the business is heavily based and we don't want to overextend it, at least in the short run.

Okay.

Do we have other questions, any comments?

Just for your information, one of your shareholders is operating a payroll system, which is very excellent for companies of your size, which operate in different countries. So if you ever come to Belgium again, I will have you meet the CEO, and you should be talking to him because I think they have expanded their services also to Canada. So originally, they were only doing that in Europe, but now they are -- I don't know how many countries, 40 countries already. So I think in order to streamline your payroll services and optimize your payroll service I think -- and they work together with your payroll providers so -- normally. So I think it would be interesting for you to have a look at it. It could -- maybe...

Yes. I'm curious, Walter. You messaged me on LinkedIn about this little while ago.

[indiscernible] is the name. I'll send you some information.

That would be great. Yes, I'm always -- anything that makes it more efficient.

Yes, some of the people in that company are shareholders in Nanalysis.

Awesome. Anything that makes my life more efficient, especially when it comes to multi payroll and multiple jurisdictions, we're open to.

It's, of course, not a priority, but in the long run -- what it does it -- like the big companies you have SAP and they have a similar system, but for smaller companies and they started it from scratch, and they're doing very well right now. So I think I should certainly advise to have a look at it.

We'll do. That would be great. And in terms of coming back to Belgium, I'm ready to come back, just invite me, Walter.

Yes. Well, at the moment my -- the last week, my golf game was ridiculous. So I think at the same time, I had Alzheimer and Parkinson I think.

You're probably better than I swing a club, Walter.

Okay. Thank you very much. I think you answered all the questions. I also listened to the yesterday conference call, and I think you answered all the questions. So I remain very positive and everybody in my list, we will get an update on your performance of the last quarter.

Fantastic. Thank you very much, and thank you to everybody for joining the call, and have a wonderful afternoon and evening.

Thank you.

Okay. Thank you. Goodbye.

Goodbye.