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

Good afternoon or good morning, everybody. My name is Matthew Selinger. I handle the Investor Relations in Nanalysis. We're just waiting for Sean and Randall to join us. We put out the Q1 call yesterday. I hope everybody might have been able to listen to that. If not, it is on our website, nanalysis.com, on the Investor Relations section. Again, the purpose of this call is for a question-and-answer session. We want to make sure that there's -- that everybody has access to management and is able to ask questions. Good morning, Randall. How are you?

Good morning, everyone. How are you -- or afternoon, I suppose.

Yes. [Operator Instructions] So with that -- good morning, Sean. How are you?

Fine, thanks.

We might as well get started. I don't know, did you, Sean, want to give any sort of high-level comments before we begin?

Yes, I don't mind. So thank you to everyone for getting on the European call, especially thank you to Walter. Looks like we still have people that are joining us every few seconds here. So -- but I'll reiterate some of the things that I said on the call yesterday, and that is we're all disappointed and coming a little bit soft on revenue at $10.6 million. It's something that we didn't expect when we were looking into the first quarter back in November and December. But it's -- we got affected by the macro environment, just like most other companies, especially companies that ship products into the United States. So I don't think it's sort of any indication of something systemic. I think it's just short-term macro conditions, and I'm confident that we're going to work through it. I think a lot of you on this call have known me now for many years. And like I've said before, over the next several years, you're going to -- you should expect some things the same, in other words, I'm going to work very hard to try to grow the company, grow top line, and at this stage in our business, expand profit margins. But the things that you're going to see that are different from what you've seen in the past is dilution. So it was part of our business plan to do acquisitions and to incur significant dilution. Well, the objective going forward is to minimize dilution, and you're going to see a lot more focus on cash flow generation and not cash burn. So -- but other than those things, sort of expect similar for me over the next couple of years, and my intention is to grow the company. So maybe I'll just stop there before I give any detail on the differences between services or products and give Walter or anybody else a chance to answer any questions or if, Randall, if you'd like to make some comments either way.

No, I'll hand off for questions. I think you covered that well, and ready to answer anything that didn't get covered yesterday.

Okay. Walter?

Yes, yes. Only one question. I don't have too many questions because you were in Belgium almost a week ago. But I was a little bit surprised on the gross margin. On the products, the gross margin was very good. But then the gross margin on the services were only 5%. I would have expected to be a little bit higher. I think there were higher last quarter. Were they?

Yes, you're right.

So what happened? What happened there?

Fundamentally, what happened was a combination of -- I can't point to one specific type of cost that grew in that segment. But overwhelmingly, what I would say is the -- that business is delivering its services effectively to our customer, but not efficiently. And that's been a trend that we saw in Q4, where margins did come down a little bit from Q3 and then drastically in Q1. So there's a combination there, Walter, of a bit of overtime, some of the travel that is not necessarily being effectively deployed as well as a number of other factors. So that's why management made the decision that we need to go down -- take the same focus that we put on to the product side and got margins up back up over to 60%, put that same focus on security services in a big way. And so we brought in a new Executive Vice President. He comes to us with a long history of working in service organizations, on service contracts as well as a long history working with not only the Canadian federal government, but with NATO and other multinational governments. So he's only been in the job a month, but so far, we're really happy with what we're seeing as far as his plans to turn this thing around and get it back on to growth trajectory. So it's -- I think having that service business expert is going to get things back on track there.

Great. [Operator Instructions] I do know that, Walter, you did send in another question, which I'm happy to read as well. Do we have any other questions? Okay. Well, I do know Walter sent a question about geographies. And Sean, does Nanalysis have any -- already have business in Africa and the Middle East? Or is that a market you would still like to potentially get into?

We do sell products to Africa and the Middle East. They're not big markets for us, but we sell instruments into Saudi and also to various parts of Africa, like North Africa, like Morocco. There are definitely areas where we could expand our business for sure. We've sold in approximately, I think, 155 countries around the world.

But they are direct sales from Canada. You don't have a representation there.

We do have dealers there. They're not exclusive, though. They're just small companies that buy certain types of scientific instruments from Canada, the United States and Europe and resell them for a fee over there. They're not like exclusive agents that are focused on our business.

One of the things, Walter, that we're doing given the U.S. market issues is putting -- we've got a detailed plan and have been having our application chemistry and marketing team going out and meeting with our dealers in specific markets, particularly Asia and some of the European markets where we don't have direct representation because we have seen in the past, when we do that, we get a notable uptick in dealer sales in those markets because our products are then top of mind in their portfolio. They've got a briefing -- a fresh briefing on how to sell them and what types of customers to be offering those products to. So that's something we're trying to do to lessen our dependence on the U.S. market, not eliminate it, obviously. But we're hoping that we can get increased sales into Asia and Eastern Europe -- and well, Eastern and Southern Europe.

Are there any other questions? Sean, I may give a question that I hear on the Investor Relations side is -- and it pertains to the USP, the US Pharmacopeia, which is an announcement that came out some months ago. And again, this kind of dovetails into also -- I'm not sure if people follow our LinkedIn page, but you'll see in our LinkedIn page, we are putting out updates all the time. A lot of them on the investor side may be technical. But this pertains more to excipients. And I know there's different white papers is coming out about excipients. Could you kind of expand on is there a strategy there to kind of to flow news into the market in terms of us demonstrating our effectiveness? And maybe my words aren't correct, but demonstrating the utility and effectiveness on different excipients that might then pertain to the U.S. -- or excuse me, to the pharmaceutical manufacturing processes?

Yes. So in December, we did a press release with the United States Pharmacopeia about the effectiveness of Benchtop NMR to do quality control on the active pharmaceutical ingredients. But we're also working with them on publishing papers on how the pharmaceutical industry can use Benchtop NMR to do quality control on excipients, which are the delivery mechanisms. So in every medicine and every drug, you have the active ingredient and then you have the delivery mechanism, the chemical that allows the body to absorb the active ingredient. And one by one, we're publishing papers on how effective Benchtop NMR is for doing quality control on all the excipients that are used in the pharmaceutical industry. So that's part of our strategy to expand the market for Benchtop NMR into not just R&D labs, but quality control as well.

And Sean, a follow-up. And if they're not, what is being used in the pharmaceutical industry right now in terms of quality control equipment?

Liquid chromatography, which is a very cumbersome old method of separating substances based on the physical size of the molecule down a complex system of glass tubes called columns. It takes days to create a measurement and it uses environmentally unfriendly solvents that have to be disposed of, and also these measurements have to be calibrated for days as well. So NMR is much faster and simpler and more information rich than the incumbent technique.

Great. So again, so Nanalysis is basically going through kind of a list of, as you said, different excipients and demonstrating that we -- that our analyzers work on those. So kind of it's a new technology to the industry. So we're demonstrating kind of one by -- going through a list and say, "Hey, look, this works on all these," so that the industry themselves are kind of seeing those papers.

Yes. And we've just started on that, which is sort of evidenced by the December press release on active pharmaceutical ingredients. But we have a consistent schedule over the next couple of years on those items.

That's fantastic. Okay. I'm going to offer up again. Any other questions, concerns, well wishes? All right. Walter, did you -- anything else?

Yes, yes. This is maybe a strange question, but the job which you do at the airports is a very, how do you say, a large job. How many people are working on that job in your service department? Because I was thinking, as I said in my -- as I wrote in my mail this morning, there are certainly opportunities in other airports in the world where you can do the same thing. The question I have is -- because how are you going to do that if you want to do something like that, for instance, in Africa or somewhere else? Because you need a lot of people there, because you had to hire how many people to do that. How does -- can you do something like that in another country with your staff? Is that possible? How do you see that?

Yes, absolutely. It depends, Walter, on the structure of the contract, I would say. So the way we're looking at expansion of that business is, first off, not only into airports. Right now, we're looking actually at expanding within Canada into other types of services such as prisons and border crossings, which use the same types of equipment, and we can use them the same workforce because we -- obviously, we have about 130 people in 24 cities across Canada. As far as internationally, it really would -- we would look at adding on services in such a way that the contract is structured where we can minimize the amount of workforce required to service it, so not necessarily structured exactly the same way we're doing it with the Canadian government. If we did, yes, we would have to obviously add foreign operations. So we'd be very strategic about how we do that. I think we'd be targeting, I forget the terminology for it, but we'll be targeting all airports or countries that have airports that are up to basically U.S. TAA standards because those -- that's the environment we work in right now, is TAA-stamped airports. So we're trained to that level and trained on that type of equipment. So we'd be looking more at European and American expansion probably first. Right now, I think we're more focused, though, on expanding the amount of services we're offering to multiple customers in the Canadian environment to maximize the utilization of the team here.

Yes. I'll give a follow-on that I get all the time, Sean. And then is there an opportunity to sell our equipment into that channel?

Yes. I mean, the way I've been describing it is in some vertical markets like pharma and food, we're going to be leading with our product capabilities and then letting customers know that we have a growing services organization because they need services, too. It's not exactly the same type of service, but it is service, especially as we grow into quality control and manufacturing. And then in some verticals like security, we lead with our service capabilities and then let the customer know that we have these portable NMR spectrometers that are capable of looking for deadly synthetic opioids and pills and powders. So that is definitely part of our long-term plan as well, part of our strategy. And that's how the products and services are connected.

Great. So with that, again, I'll offer up. Is there any kind of -- any other questions here? Okay. With that, I think we'll wrap up the call. Randall, Sean, do you have any kind of closing comments? We do thank everybody for obviously your support and your participation. We look forward to reporting our Q2 in a few months. So with that, Sean, did you have any other -- any final remarks?

Yes. I'll just thank everybody for getting on the call, and I look forward to the next opportunity to discuss our business with you.

Great. Thank you.

Thank you, everyone.

Thanks very much. Thanks, Walter.