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

Okay. Good morning or evening. Welcome to the second quarter 2025 analysis Scientific's European Conference Call. I'm Jake Bouma, IR representative for Nananalysis. I'm going to put everybody in mute only mode. If you have any questions, feel free to raise your hand, and we'll address them. I'll hand the call over to Sean Krakiwsky, our CEO.

Yes, thank you very much, Jake, and welcome to everybody on the call. First of all, I'll talk a little bit about Jake and Trevor. We -- in the past, we've had Matt Selinger as our IR manager, and he used to run these calls and Matt is still a friend of the company, but we just felt like the network that Jake and Trevor have is better for our company at this stage. And so we -- and they were also very highly recommended by our most important and largest institutional investors. So that's sort of why we've made that change, and we're really happy to be working with Jake and Trevor today and going forward. With regards to our second quarter financials, I think you'll all agree that they're disappointing, but I have to say that it's also in the context of some very difficult economic conditions that we've been dealing with. So when we entered 2025, we had just had a great fourth quarter in 2024. Our sales pipeline was full and brimming. We were on the -- at that time, we're on the verge of launching a new product, which we did. We started shipping it commercially in March. So again, from the perspective of entering 2025, we were very optimistic, and we felt like we've made a lot of positive changes. We are continuing to make changes. So I don't want to convey that we thought we were sort of done with our restructuring efforts and with getting where we needed to be. But we did think that we've made tremendous progress and that we were on our way. And then we started getting signals from the -- from our customers from the market that our customers went from, yes, we're ready to buy 3 units of Benchtop NMR, for example, to, we don't know if we have a job, we don't know what our budget is. So we're putting all our purchases on hold. And so we were totally blindsided by that. As we got into the meat of the first quarter and then once we got to the end of the second quarter and the beginning of -- the end of the first quarter, beginning of second quarter, it was clear to us that there were some things happening that were outside of our control to a large extent. And so we do feel like things have changed. And not to say that all aspects of the uncertainty globally have gone away, but rather that kind of customers and so on have kind of gotten used to it. So it's not everybody knows now what's happening. And so it's not a shock to anybody's system. And therefore, planning and capital budgets and that sort of thing are stabilizing from what we've experienced. And so we are very confident in our second half of the year, and we're just committed to working through this. So -- and that -- everything I just said there pertains mostly to the product side of our business, which is where we've fallen short. We continue to rightsize. Over the years, we've had very -- some very successful R&D projects. And so with those investments, we don't need to keep making those investments. So we do -- we are continuing to get our company rightsized such that we become sustainably profitable in the future. So we're confident that we're not that far away from that. And I just -- my main point there is just to be conveyed to shareholders that we're committed to getting there, and we believe that we can. So on the services side of our business, we're just really happy with the changes that we've made in leadership there with Mark Tomlinson. And then he's made many changes himself underneath him. And the customer is very happy with the direction of that business, the main customer, I should say, which is CATSA, which is the Canadian Airport Authority. So much so that on a regular basis when our managers in that group as they travel the country and visit certain airports and have certain team building exercises. The customer is reposting our LinkedIn and our social media posts that we make. And so -- and is very supportive of all the things that we've done there and the changes that we continue to make with the #1 objective being to increase gross margins. We made some tremendous progress on that project when we went from inception, right, where there was 0 revenue, 0 activity. And then we fully deployed the project and had huge costs and still 0 revenue. And then we had some nominal revenue there. The margins were still negative. And then we got the margins slightly positive, and then we made some progress from there. But then we stalled approximately a year ago. And so that was frustrating, and we feel like with the new leadership in place, we're going to be able to get back on the right track with regards to getting gross margins where they need to be. And we have an immediate objective of getting them up towards 15% to 20%. And then after that, towards 25% to 30%. So that's an objective that we have that it's not going to be easy to do. There's going to be an incredible amount of hard work to get there. But we're confident that the team is going to succeed in that regard.

So I do have a couple of initial questions from Walter with regards to our business. So one of them is, you referred to the tariff uncertainty as a reason for the decline in product sales. Is that because of, a, tariffs levied on your products sold to the United States; or b, uncertainty on the effect of this tariff in general on the economy and as a result, customers delay their orders. So thank you very much for this question, Walter. And so the answer is the decline in product sales has not been because of tariffs levied on our products, but rather the second point that Walter made, which is the economic uncertainty. We do not pay tariffs on our products. We're shipping instruments into the United States every week. And I can tell you, despite the confusion that's in the news and the public media there are no tariffs on our products from Canada into the United States. And that's because they still fall under the existing free trade agreement between Canada, Mexico and the United States. What you've seen in the news about tariffs from Canadian products, those have to do with very large economy items like raw steel or raw aluminum or lumber and wood, they don't apply to technology products. But what has been a big problem is the uncertainty associated with that tariff environment. And if you remember, up until very recently, the United States was essentially operating without a budget in place, as has been Canada, by the way, federally. But with the recent passing of what was called in the news, the big beautiful bill, which wasn't that long ago in the United States, that opened up the monies for all the federal government organizations and then the people that sort of feed off the federal government organizations, whether it's R&D departments at private companies because there is a connection there and also state-funded universities and so on. So that passing of that bill did free up monies and remove some of the general uncertainty. And therefore, we have seen a return to the orders that were stalled. I always refer to one in particular, from the Federal Drug Administration in the United States, the FDA. There was a deal that was in place there and then that stalled and now it's coming back. So we are seeing that, and we expect to have a very good third quarter. So that was part of Walter's last question is how do we see the outlook and what is the relationship between Canada and the United States. And the short answer is the economic relationship between Canada and the United States is excellent. There's the occasional flare up with words, provocative words. But at a substantive level it's excellent, and I expect it to continue to be that way. I will, just for the sake of completeness and for the sake of fair disclosure, I will mention that we are facing some challenges associated with Chinese export controls. So not tariffs per se, although they are caused by American tariffs on Chinese products. But specifically, they have to do with heavy rare earth metals in magnets that the Chinese government has started to put very strict controls on. So that's something that we're focused in on right now is ensuring that we get the magnets that we need from China in order to build our products, especially for later this year and into 2026. So while I feel very good now about our sales funnel and the purchase order flow that we're seeing from customers. I'm now turning my focus towards some supply chain challenges that again, nothing specific to Nananalysis. It's all been in the public media with regards to getting these magnets. And I'll be going to China later next week or early the week after to meet with our suppliers and our partners over there, including our distributors. We sell our products into China. So not only do we get our magnets from China, but we sell our products. Our products are used in Chinese universities and so on. And that's a good thing, by the way, from the perspective of the supply chain. So we're not buying magnets and then putting them in American cruise missiles or F-35s, we're putting them in products that are used in every country around the world. for the betterment of society with better materials, better food stuffs. So our products are not military in any way. So I just want to again point out that, that is another aspect of our challenging operating environment that we're in right now, and we really appreciate all the support that we have from shareholders as we continue to try to get our business from roughly around $40 million a year revenue run rate and this quarter, slightly EBITDA negative to where we really want to go, which is substantially higher revenue and sustainable positive EBITDA and so on. So thank you very much for all your I mean just the fact that you're on this call today, thank you very much for that. And I can assure you that we're doing everything we possibly can to deal with these various challenges that we're facing operationally. So I think I answered the questions that Walter submitted to me. But Walter, if there's any follow-up questions you might have or if anybody else on the call, would like to ask any questions. This would be a great time. So maybe with this group here, Jake, I think if you're -- if we're just -- we're having challenges with the audio, from my perspective, it would be okay to just open up everybody's audio and let everybody ask whatever questions that they have. It might be a little bit easier that way.

Yes, sure. I think everyone is unmuted if they want to mute themselves and ask.

Okay. So Walter, did I address your questions satisfactorily.

It's very much so. Do you hear me?

Yes. Yes, we do, Walter.

Yes, very much so, and we are looking forward to your next results next quarter. Hopefully, the sales will recover because I congratulate you with improving your margins because that was successful. So hopefully, some of the economic conditions will improve and you are successful in your endeavors in China for your supply chain challenges. And we're looking forward to see you next quarterly figures. Thank you very much for the update.

Thank you, Walter. And I am glad you brought up the gross margins because that is one of the highlights in our results in that on the services side, sequentially, not year-over-year, but quarter-over-quarter, we did show progress there. And then on the product side of the business, which remember is mostly our proprietary Benchtop NMR. We do have impressive gross margins, and we are very confident that those will continue to go in the right direction. And some of these supply chain challenges that we're currently having in getting magnets, might end up becoming in the future a blessing in disguise because we've been forced to identify some supply alternatives. And we found that we have a chance to significantly reduce our costs on those critical components. So those are the largest cost in our products compared to any other sort of part of our product. So if we can figure out a way to drastically reduce those particular costs in the future, then again, there's -- that will be another example of how we have been able to improve gross margin. So many, many years ago, we were very aggressive with our R&D efforts. Our gross margins weren't as good as they are now and our products weren't as good as they are now. But that's all changed. We have made tremendous progress in terms of our product family. Our old generation technology has been out of life. In other words, it's the new generation of technology that we have now both on the software side and the hardware side is what we sell. So we're very proud of our R&D accomplishments. I realize that there's been so many other things going on with our business, including on the services side with CATSA and all those changes that maybe it's been difficult to sort of focus and understand or see, I should say, from what we've done on the product side. But I can assure you what we've done on the product side is very impressive in terms of the customers' belief in them and the customers' experience. And so one reason why that's important is because it does give us new levers with our business today that we didn't have even 9 months ago or that we didn't have 2 years ago in different ways. By the way, 9 months ago was not the same as 2 years ago. But we have more levers today to try our best to achieve bottom line profitability than we did in the past because of the R&D successes that we've had and the associated manufacturing successes. So yes, Walter, thanks for bringing up the gross margin part of our business. So several other people on the call. I'm happy to -- I think I see even a couple of employees that are new to our business as well. So I would encourage anybody if they have any questions or even comments that they would be welcomed. So please feel free to speak openly. Okay. With that, maybe I'll ask our CFO, Randall McRae. If you'd like to make any comments, and we'll see -- we'll go from there.

Yes. Thanks, Sean. I think you did a good job covering the overview here. So I'll just redirect, ask another question here and see if anybody has any particular financial questions that they want to ask while they've got particularly me on the line. I'm happy to address anything. So I'll put that out there. And if not, we'll pass it back to Sean for closing remarks. Alright, that sounds like it's over to you, Sean.

Okay. Thanks very much, Randall, and thanks to everybody for getting on the call at this time. Really appreciate it. And we always want to make ourselves available to European investors or people that aren't able to join the first call on the Thursday afternoon. So it's a great opportunity for us to continue to reach out to different aspects of our shareholder base. So again, thanks very much for joining the call. Really appreciate it, and we look forward to any future opportunities to talk about our company with you. And if you want to reach out to me directly, please feel free to do so at any time. I love talking to our shareholders, and I love talking about our company. So please feel free to do that. So thank you very much, and I hope you all have a wonderful day or a wonderful evening.

Thank you, Sean.

Thanks, Walter. Thank you. Bye-bye.