Nanalysis Scientific Corp
XTSX:NSCI
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Nanalysis Scientific Corp
Earnings Call Analysis
Summary
Q2-2024
In its latest earnings call, Nanalysis Scientific reported a record revenue of $11.5 million for Q2 2024, reflecting a 65% increase from last year. The gross margin on product sales was 50%, aided by manufacturing cost reductions. The company also achieved positive adjusted EBITDA of $414,000, up from a loss of $2.4 million a year prior. Growth in the Benchtop NMR business and improved performance in security services drove this success. Looking ahead, the company expects continued momentum and product innovations as it targets over 25% gross margins in services. Nanalysis aims to maintain strong revenue growth while managing costs effectively.
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Good afternoon, ladies and gentlemen, and welcome to the Nanalysis Scientific Q2 2024 Conference Call. [Operator Instructions] This call is being recorded on Wednesday, August 28, 2024, I would now like to turn the conference over to Mr. Matthew Selinger, Investor Relations. Please go ahead.
Thank you, operator, and welcome, everyone, to Nanalysis Scientific's Second Quarter 2024 Conference Call. Before we begin, I would like to remind everyone that our remarks and responses to your questions today will contain forward-looking statements that are based on the current executions of management. These assumptions involve inherent risks and uncertainties that could cause actual results to differ materially from our responses. Certain material factors and assumptions were considered and applied in the making of the forward-looking statements. These risk factors are included in our filings for the year ended December 31, 2023.
Forward-looking statements on this call may include, but are not limited to, statements and comments with respect to future growth of the company's business, the ability to graduate to a senior exchange, the company's acquisition strategy, the ability to develop future products in the possible associated results. The company's actual performance and financial results in the future could differ materially from any estimates or projections of future performance implied by the forward-looking statements.
The forward-looking statements made on this call speak only as of today, and Nanalysis Scientific assumes no obligation to update any forward -- any such forward-looking information as a result of new information, future events or otherwise, except as expressly required by applicable law.
For additional information, I do encourage everyone to review our public filings and press releases, which are posted on the SEDAR filing system, which is at www.sedarplus, S-E-D-A-R-P-L-U-S.ca.
So on the call with me today are Nanalysis Founder and CEO, Mr. Sean Krakiwsky and Nanalysis CFO, Mr. Randall McRae. Throughout this point in the call, I would like to turn it over to Nanalysis CFO, Randall McRae. Randall?
Thanks, Matthew. It's a pleasure to join and speak with everyone on the call today. I'll now dive into the financial results for the quarter ended June 30, 2024. All amounts herein are referenced in Canadian dollars. Financial highlights for the 3 months ended June 30, 2024. The company reported consolidated revenue of $11.5 million, an increase of $4.5 million or 65% from the comparative period in 2023. Gross margin percentage on product sales was 50% for the 3 months ended June 30, 2024. Improvement in gross margin percentage for Benchtop NMR is materializing. The sales have improved in the first half of this year, and manufacturing cost reduction started in 2023 have begun to positively affect margins.
Security service gross margin percentage in the quarter was 10% versus negative 36% in the prior year comparative period. As the company completed the full transition of 100% of airport service to its control from the incumbent provider in the first quarter of 2024. And now expect to increase revenue and drive efficiency within this business through 2024. While keeping costs stable. Adjusted EBITDA for the 3 months ended June 30, 2024, was $414,000 versus an adjusted EBITDA loss of $2.4 million in the same period last year. This improvement was driven by increased product sales, full transition of airports to the company's control, resulting in increased Security Services revenue and the effect of cost reduction initiatives. Net loss, which includes a number of noncash items, was $2 million for the 3 months ended, as compared to the 3-month loss for June 30, 2023, of $4.1 million. The company had approximately $1.1 million cash on hand, an undrawn credit facility of $3.2 million and working capital of $5.2 million as of June 30, 2024.
We're very happy to have achieved multiple financial milestones this quarter. First, we're very encouraged to have had another record revenue quarter. Second, and more importantly, we were able to achieve EBITDA positivity for the company as a whole. As many of you know, this has been a stated goal of ours for some time, and we are very encouraged to have achieved this. This is a direct result of higher revenues in both our operating segments as well as our cost reduction plan, which started in the prior year and continued into this year, with the goal of better aligning our resources and reducing our fixed costs. That being said, our work is done. We continue to evaluate other fixed cost reductions to further increase annualized cost savings and will continue to apply cost reduction measures through 2024.
Additionally, we believe there's leverage in areas like security services, where we can optimize staffing and utilization for margin expansion, which we did see some improvement in this quarter. While we are overall very encouraged, we will not take our eye off the ball to continue to drive revenues and margins upward as we go forward.
And with that, I'll pass it over to our CEO, Sean Krakiwsky.
Thanks very much for the financial overview, Randall. I too, I'm proud of what we are accomplishing here and I echo the sentiment that we must remain steadfast with cost reductions as we drive revenue growth. I am indeed pleased that we accomplished another record revenue quarter of $11.5 million. Additionally, and just as importantly, we achieved positive EBITDA company-wide another important milestone and previously stated goal for our company. We are growing both our Magnetic Resonance products business as well our Services business with very sticky recurring revenue. And it is my vision to make these 2 businesses work synergistically as we build a world-class scientific instrumentation company.
With over half of the year behind us, I am very pleased with these results and I'm even more enthusiastic about the momentum we have going into the back half of the year, which historically has been stronger than the first half. In our Benchtop NMR, we continue to see sales and our sales pipeline strengthened. We have met our sales targets for 4 quarters in a row, and we expect this to continue for the rest of the year and beyond. We achieved solid growth year-over-year, and we will have an excellent second half of 2024. We continue to innovate in this business with an exciting product announcements anticipated before the end of this year.
Our 100 megahertz instrument is the top of its class in Benchtop NMR, and we are applying all those advancements to our 60 megahertz product, which will allow us to dominate in the sweet spot of the market opportunity. While originally, this technology was predominantly hardware centric, as we continue to build out our installed base, we are now equally focused on software innovation, including AI techniques for specific applications such as illicit drug detection and QA/QC of medicines, as evidenced by our press release in April of this year regarding a $1.5 million award from the National Research Council.
We have built up a catalog of over 50 application notes and over 100 co-authored peer-reviewed scientific papers, with collaborators all over the world. In the future, we will talk more about these publications and collaborations, including progress in generating regulatory tailwinds for our Benchtop NMR products. Not only will we launch products at different price points, but we are also evolving towards providing smart solutions associated with these products to customers and vertical markets. We will sell these solutions via our expanding direct sales organization, and we will also establish partnerships with value-added resellers that have deep channels into these vertical markets.
In the area of MRI and medical imaging, as Randall mentioned, we had a solid quarter bolstered by a sizable sale to our customer in Geneva, and we expect this pattern to continue in the second half of the year. In particular, our proprietary MRI console has attracted significant interest from partners that are thought leaders in next-generation MRI technology and products. I always like to emphasize that from a fundamental math and physics perspective, the technology associated with MRI is the same as with NMR and our technology platform is shared and leveraged across our different emetic residence product families of Benchtop NMR, MRI and High Field NMR, where we have an ongoing partnership and investment in Quad Systems AG Switzerland. We've made tremendous progress on our proprietary MRI console over the last 2 years and are now shifting into a new level of partnership exploration, which I believe will bear fruit for our company for years to come as we steadily move towards the vision of 1 day having a clinical MRI product.
Regarding the specific investment in Quad Systems AG at High Field NMR. In 2023, we announced that after years of joint R&D with Quad, that the company would begin to rely less on analysis on a day-to-day basis. Today, Quad Systems has a commercially viable product and is building its sales pipeline. We are proud of the role we've played in incubating Quad Systems, and we believe strongly in the market opportunity for their product. We remain 43% owners of the company, hold 2 seats on the Board of Directors, and we continue to provide them with our proprietary console and software as part of their overall High Field NMR offering. We also have a distribution agreement with Quad giving us the right to sell High Field NMR in several territories.
There are tremendous synergies that exist between Quad and Nanalysis. My original objectives associated with Quad Systems have not changed, and we are exploring new ways to achieve those objectives.
Regarding third-party equipment, which is predominantly the reselling for Agilent's scientific instrumentation group, we've seen steadiness in this area. We expect that to continue to be the case for the remainder of 2024. We may revisit these kinds of reseller agreements in the future as our proprietary products require more and more attention from our own marketing and sales organization.
In the meantime, we look forward to continued steadiness from this and other such relationships as they constitute not only incremental revenue, but also opportunities to knock on the doors of more and more customers in our space.
Shifting gears now to our growing services business. We continue to grow revenue and margins on the $160 million CASA contract, as Randall alluded to. Since taking full control of 100% of the Canadian airports at the beginning of the year, we have been in charge of the basic service and maintenance in all 89 airports, with a team of over 100 trained and credentialed field technicians performing preventative and corrective maintenance for all passenger imaging and screening equipment. It was a very busy summer travel season, which resulted in increased work quarters. With the basic services to the customer being fully established in February, we then started to tackle the backlog of extra projects that the customers specify for us, constituting significant revenue growth with little extra costs.
We have been adapting well to the ebbs and flows of this business, and we are confident in achieving sustained growth. There is plenty of work to be done with our existing workforce, and we continue to optimize workflows and utilization rates. As we become more and more entrenched with the customers, the backlog of extra projects continues to grow, which we expect to yield expansion of gross margins and bottom line profitability. While the CASA contract remains our largest source of services revenue, it is not our only source and our objective is to grow this overall service business, eventually making it fully synergistic with our Magnetic Resonance product business.
Overall, in summary, with 2 quarters behind us and nearly 2/3 of the year complete, I remain very encouraged by our results to date and I'm optimistic about the remainder of the year. We had a strong Q1 and a stronger Q2 with record revenue in the quarter and positive EBITDA. From a year-over-year perspective, we've made tremendous progress. We are experiencing solid growth and continue to successfully shed costs without negatively affecting trajectory. We've also succeeded at ramping up our large service contract and transitioning it from a major source of cash burn to a source of gross profit. Even though we've made tremendous progress, we feel like we are just getting started. Our core DNA is that of a coincidental technology innovator, and we have also evolved into a solid operational company with a strategy of combining high-margin proprietary products with sticky recurring revenue in the area of imaging and detection equipment.
We are pleased with our revenue trajectory, and we'll continue to expand margins. As we progress, we remain as eager as ever to learn and thus optimize as we serve our customers and launch new products. Innovation and a commitment to operational excellence will fuel our business going forward. We have not taken our focus off the goal to continue to drive down costs while increasing revenue steadily in 2024 and 2025. Ultimately producing a profitable and sustainable company. As always, I want to thank our incredible employees for their tremendous efforts and our shareholders for their continued support.
Operator, I would now like to open up the call for questions.
[Operator Instructions] Your first question comes from the line of Stefan Quenneville from Ventum Financial.
I guess my first question is on sort of the persistence of just being EBITDA positive over the next couple of quarters? Like again, this is ahead of our expectations with the quarter you had. But it seems like with the medical MRI sort of, I would say, surprise upside revenue there. As well as the seasonality in the Benchtop business, as we know, Q3 tends to be a bit softer because of academic markets, so the ones in -- summertime is a bit slow there. Do you expect that Q3 and Q4 to also be EBITDA positive?
So I'll -- let me jump in for Stefan. It's Randall here, and then I'll pass it over to Sean to talk a little bit about kind of the Q3 outlook, but yes, you raised a good point. We did have a medical imaging sale here in the quarter, although those tend to be a bit lighter on margin for us. So the contribution to EBITDA is -- is quite a bit smaller than some of the other businesses. And the 2 big components, though, Benchtop NMR and our Security Services business, the numbers we're seeing in Benchtop NMR are good, but they're not numbers that are so out of -- the realm of what we've done in the past.
So I absolutely think we can continue to maintain momentum in Benchtop and then for Security Services, we're seeing strong activity, but it's regular activity. So we -- our goal with that business, as we said earlier in the call, is to continue to grow that top line and continue to manage efficiency as well. So yes, I think we're in a good trajectory right now.
Sean, if you want to give a little bit about the Q3 outlook, I'll pass that over to you.
Thanks, Stefan, for the question. [ Maleko ], Randall's comments and just say we're -- we've got -- we've set ourselves up such that we have many ways to win. Revenue growth, margin expansion, our cost in Q3 and Q4 will be substantially lower than our costs were in Q1 and Q2. And I feel great about Q3. I don't feel like -- I mean, yes, the medical imaging sales, there is sort of a lumpiness to them, that's true. But I see no reason why we're not going to see those same things in Q3 and Q4 as we have in the past. Our proprietary MRI products are coming on strong with some very interesting partnering activities occurring.
So without sort of giving quantitative kind of guidance or anything? I feel extremely confident that the second half of the year is going to be better than the first half of the year on all fronts.
So Stefan, maybe do you mind if I -- sorry...
Better [indiscernible].
I was going to say -- I was going to say, just to add a little bit of clarity to my comments, I wanted to give you a bit of insight on to the -- kind of some of the components of revenue here in the quarter. But, all in all, I think the key here is, yes, I do believe we've crossed the threshold and we'll continue to generate positive EBITDA going forward.
I just also want to add to that step. I'm sorry to cut you off that in. But -- and remember, our objectives are just to be EBITDA positive. Our objectives like -- and by that, I mean, we've been like meticulously executing on a plan not only to get EBITDA positive, but also like outright cash flow positives and like bottom line after tax net income positive. So -- so that plan is continuing going forward.
Well, it's -- you started at to my next question, which was to get to that sort of -- free cash flow positive and net income positive. What level of revenue are you looking for broadly on a quarterly basis, where do you feel that that's achievable?
So I would definitely encourage everybody to take a look at our cash flow statement. One of the things that I'm really, really happy about for the 6 months -- for 6 months of the year, we've generated strong positive operating cash flow. And our positive EBITDA is one reflection of that, but I'm quite happy about where operating cash flows at. If you look at then the amount we spend on capitalized R&D and the amount of spend on capital assets, it's relatively light. So for us to get there, we're talking, to cover those costs in the mid-6 figures. And then after that, we obviously have to deal with continued repayments on our bank loan.
But we're looking at, several million more to start getting to that stage of positive cash flows of top line revenue. And of course, it depends on the revenue mix, right? Our -- our security service business is heavily fixed cost oriented. So $1 of revenue in that business has an outsized impact compared to product sales. But we're working on growing both of those and getting ourselves to positive cash flow. And then, Secondarily, as we said on the earlier part of the call, we're not done with efficiency and cost management. That is a key part of continuing to execute and getting ourselves to positivity. So my laser focus right now is getting us to positive cash flow. And I think that's going to result in positive net income shortly thereafter.
Okay. And I just wanted to circle back on to the Benchtop business. Obviously, that one -- that's been monthly the last -- a little while, excellent quarter. You said the pipeline is looking good. Can you just give me a bit better sense of the overall backdrop. And obviously, it looks like you're executing sort of better than -- we expected on that. And we saw very build up about product launches in the back half of the year around the 60 megahertz. Can you just maybe dive a little bit deeper into what you're seeing there and what we can maybe expect over the next -- the back half of the year maybe to 2025 as well?
Yes, absolutely. So this is Sean. We've been working very hard on the fundamentals. After, we had those well-documented operational hiccups over a year ago, I guess, 18 months ago or so, we've just been focused on lead generation and expanding our -- our direct sales organization and expanding our different types of distributor networks and just like really like digital marketing and all that sort of stuff. We've really been focusing on that, and that's what's caused our sales pipeline. To strengthen, and that's why I'm so confident that the second half of the year is going to be a lot stronger than the first half of the year, even though the first half of the year was decent. And so that's -- those sorts of fundamentals that are going to carry strength into the rest of this year and into 2025.
And then sort of beyond that, where we're expecting to see continued exciting growth from there is through value-added partnerships. And we talked about this quite a bit in the past, but we continue to have great discussions with companies that can take our products deep into vertical markets like food and so on. And regulatory tailwinds are part of that as well. We've had United States Pharmacopeia methods approved by that governing body, which is closely related to the FDA in the United States. Mostly for pharmaceutical processes like quality control of excipients. Excipients is a substance that's -- a type of substance there's different kinds, type of substance that's in every medicine that deals with delivering the active ingredient into the body.
So it's a very important part of pharmaceuticals and medicines, and we've been successful at working with the United States Pharmacopeia to drive requirements for Benchtop NMR, and that's going to be another thing that -- that drives growth going forward sort of like into the -- beyond the previous time frame that I mentioned. So really excited about that. And there was another part of your question about product announcements later this year. So right now, we were really great at the high end of Benchtop NMR with our 100 megahertz. It's the top of its class. It's very expensive as well. And then we're very successful sort of at the lower end. I'll refer to that as maybe the academic part of the market. With a really like great user friendly, reliable product that's good for price-sensitive customers.
And a product announcement before the end of this year will have to do with how we're going after the middle of that market. So industrial customers who are performance-sensitive, but the volumes that they purchase at are such that they need price points that are lower than our 100 megahertz product currently is at. And I think that's the sweet spot of the market going forward. The low end and the high end will always be there. But that midrange is really what's going to drive volumes going forward.
So we're really excited about the product announcements that we have coming up here. We've just had some tremendous R&D successes over the last 6 months or so.
Okay. And I assume that's also going to drive that announcement is going to be driving potential vertical partnerships, right? Because you've firmly kind of crack the code on, on the performance and cost to drive -- is that out of the...
That is exactly right. Absolutely.
And just one final question for me. Just on maybe a target gross margin in the Services business. And you guys -- you have something you're looking to get to on the -- did a great job this quarter on the business. But is there a number you want to get to your targeting in terms of gross margin?
Yes, there is. We've talked in the past about 25-plus percent EBITDA margins. On that business. And frankly, we're not done working on it. We're not done growing it and working on our efficiency until we're getting into margins of that type.
And I think Stefan was asking about the gross margins. So I think Randall would say that we're targeting like 30% plus in terms of the gross margin.
Yes. They're fairly -- they're fairly [indiscernible] the way the costs are laid out.
There are no further questions at this time. I will now hand the call back to Nanalysis CEO, Mr. Sean Krakiwsky. Please go ahead.
Thanks, operator, and thanks very much to all the shareholders that participated in this call. We really appreciate your time. For those of you that are in Calgary or nearby -- we have a shareholder barbecue tomorrow, which we do typically once a year. So everybody is welcome to that. Some of our employees took up some of their favorite dishes and it's just a fantastic time here. So I hope to see you there. And then also tomorrow morning, we're doing this for European investors as well, and we look forward to that.
And as always, I look forward to any opportunities to speak with investors buy them dinner and so on, I'll be at probably LD Micro in L.A. and then not to do some future and then the CEM event in Muskoka in September.
So if there's any opportunity for me to buy you dinner or sit down for a cup of coffee, please let me know, and I'd love to do that.
Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.