Nanalysis Scientific (NSCI) has reported a substantial increase in its first-quarter revenue for 2024, with a notable rise in both product sales and service revenue. The company's consolidated revenue reached $11.2 million, marking a 139% increase from the same period in the previous year.
The improvement in gross margin percentages across its product sales and security services, along with a significant reduction in EBITDA loss, underscores the company's forward momentum. With a solid financial base and strategic initiatives in place, Nanalysis Scientific is poised to continue its trajectory towards sustainable profitability.
Key Takeaways
- Nanalysis Scientific's consolidated revenue for Q1 2024 surged to $11.2 million, a 139% year-over-year increase.
- Product sales contributed $4.2 million, while service revenue accounted for $6.9 million.
- Gross margin on product sales was 47%; service gross margin improved significantly to 8% from a negative figure last year.
- EBITDA loss reduced to $362,000 from $3.5 million in the same quarter of the previous year.
- The company has a healthy financial position with $1.7 million in cash and significant working capital.
- Nanalysis Scientific has taken control of all served airports in Canada for its security services and anticipates increased efficiencies and revenue.
- The company is optimistic about its High Field NMR product line and is establishing demonstration labs in key locations.
Company Outlook
- Service business gross margins are expected to improve further as the company moves past capital-intensive phases and lowers training costs.
- Nanalysis Scientific is aiming for positive EBITDA and profitability across its business units by focusing on cost reductions and revenue growth.
- The company plans to leverage its trained workforce and assess additional opportunities in the services sector.
Bearish Highlights
- The company acknowledged the impact of inflation on the cost of goods sold, particularly affecting parts and semiconductors.
- Nanalysis Scientific is implementing ongoing cost reduction initiatives to counteract inflationary pressures and improve margins.
Bullish Highlights
- Demonstrated a strong increase in service and product revenue, with significant improvements in gross margins.
- The company is expanding its presence in the security services market, having achieved full control over Canadian airport services.
- Anticipated revenue growth and efficiency improvements in the security services business throughout 2024.
- Expansion of the High Field NMR product line and positive expectations for sales and business evolution in the medical imaging sector.
Misses
- Despite overall positive performance, the company still reported an EBITDA loss for the quarter.
- Challenges due to inflation have affected the cost of materials, although this is expected to level off.
Q&A Highlights
- Discussed revenue fluctuations in the CATSA business and sequential growth expectations.
- Addressed enhancements to the benchtop NMR product and potential partnerships in vertical markets, including medical imaging.
- Explored the impact of inflation on material costs and the company's proactive measures to manage it.
In conclusion, Nanalysis Scientific has demonstrated a robust start to 2024, with significant revenue growth and improvements in efficiency and margins. The company's strategic initiatives and focus on cost management are expected to drive its journey towards achieving sustainable profitability. Investors and stakeholders are likely to watch closely as Nanalysis continues to expand its product offerings and capitalize on its service sector opportunities.
Full transcript - None (NSCIF) Q1 2024:
Operator: Good afternoon, ladies and gentlemen. Welcome to the Nanalysis Scientific Q1 2024 Conference Call. [Operator Instructions] This call is being recorded on Wednesday, May 29, 2024. I would now like to turn the conference over to Matthew Selinger, Investor Relations. Please go ahead.
Matthew Selinger: Thank you, operator, and welcome, everyone, to Nanalysis Scientific's First 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 expectations 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 making 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 and 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-looking information as a result of new information, future events or otherwise, except as expressly required by applicable law. So for additional information, I encourage everyone to review our public filings and press releases, which are posted on the SEDAR filing system at www.sedarplus.ca, which is S-E-D-A-R-P-L-U-S.ca. On the call with me today are Nanalysis Founder and CEO, Mr. Sean Krakiwsky and Nanalysis CFO, Mr. Randall McRae. So with that, and at the plant of the call, I would like to turn the call over to Randall McRae. Randall?
Randall McRae: Thanks, Matthew. It's a pleasure to join and speak with everyone on the call today. I'm now going to dive into the financial results for the quarter ending on March 31, 2024. All amounts referenced are in Canadian dollars. Financial highlights for the 3 months ended March 31, 2024, include, for the 3 months ended, the company reported consolidated revenue of $11.2 million, an increase of $6.5 million or 139% from the comparative period in 2023. This includes approximately $4.2 million in product sales and $6.9 million of revenues related to services. $2.2 million of service revenue came from flow through inventory associated with the company's airport security maintenance contract in which the company provides purchasing and resale to the customer at cost, with the company billing a fixed charge for the service. This revenue can vary widely quarter-over-quarter and may be significantly lower in future quarters. Gross margin percentage on product sales was 47% for the 3 months ended March 31, 2024. Improvement in gross margin percentage for benchtop NMR is materializing as sales have improved in the second half of last year and continued into the first quarter of this year. In addition, reductions in manufacturing labor late in Q2 2023 have begun to positively affect margins. Security service gross margin percentage in the quarter was 8% versus negative 76% in the prior year comparative period as the company has completed its full transition of 100% of airport service to its control from the incumbent provider and now expects to increase revenue and drive efficiency on the projects through 2024. EBITDA loss for the 3 months ended March 31, 2024, was $362,000 versus an EBITDA loss of $3.5 million in the same period last year. This improvement was driven by increased product sales, full transition of airports to the company's control and cost reduction initiatives. Net loss, which includes noncash items for the 3 months ended, was $2.5 million as compared to the 3-month loss from March 31, 2023, of $4.3 million. The company had approximately $1.7 million cash on hand, an undrawn credit facility of $3.2 million and working capital of $6.3 million as of March 31, 2024. As noted above, we booked considerable revenues from flow-through parts this quarter related to our Security Services contract. As we have stated before, these will tend to be lumpy for the life of this contract. This quarter was particularly large. As such, we have now broken out these in a table in the press release. That being said, we are very happy to report that our service business gross margins turned positive this last quarter and was EBITDA positive. We expect these margins to continue to improve as the capital-intensive portion of this project is over, and we'll see reductions in training costs going forward. We feel we're in a good financial position and are poised to now reap benefits of this long-term project. Additionally, we continue to look for opportunities where we can now leverage our trained workforce. Finally, we continue to see the results from our cost reduction plan, which started in the second quarter of 2023. The goal is to better align our resources and reduce our fixed costs. We are seeing these manifest in improved gross margin percentages, which began in the fourth quarter of 2023. The company continues to evaluate other fixed cost reductions to further increase annualized cost savings and has continued to apply cost reduction measures in 2024. I'll reiterate our goals for the year, which are to continue to grow revenue as well as our margins by focusing on positive EBITDA than profitability for the company as a whole. I'm happy and encouraged by the progress we're making here. So with that, I'd like to now turn the call over to our Founder and CEO, Sean Krakiwsky.
Sean Krakiwsky: Thank you very much, Randall. To build on what Randall said, I am very happy to report another record revenue quarter of over $11 million in top line results. We are starting to see the makings of a solid scientific instrumentation company with both products based on world-class technology and sticky recurring service revenue. In that context, we are happy to see our Services gross margins shift into positive territory with the transition from phase into full deployment of the airport security project complete. Having our Services business become EBITDA positive is another milestone we are proud to have achieved. In fact, as a company, we had only a small nominal EBITDA loss for the quarter and look forward to shifting this into positive territory. We have all the confidence that we will achieve that goal this year. Regarding our benchtop NMR business, we are very happy about our sales and prospects within this business. We feel this group is on the right track, and we are focusing on growth and continued innovation. We have previously discussed that we are applying the advances of our 100 megahertz product to our 60 megahertz offering. We feel that this will improve our position in the market, providing us with higher performance products at more price points. We hope to release these new products towards the end of this year, yielding revenue growth via direct sales as well as future partnering opportunities. Our steadfast goal and commitment this year is to achieve positive EBITDA in the benchtop NMR business as well as our other business units. We are working very hard to achieve this objective by cost reductions and revenue growth. To provide more detail on our Security Services business, as previously announced on January 11, we took 100% control of all the served airports ahead of the contracted March 31 turnover date. We are happy to report we have exited the phase-in period and are now in control of the basic services and maintenance of all 89 airports in Canada. The phase-in period involves our team hiring and training over 100 technicians and taking over all preventative and corrective maintenance services for passenger screening equipment at 89 airports in Canada from the incumbent service provider. We will now focus on working through the backlog of additional projects and requirements that our customer has for us. With the reduction in ramp-up costs in training, this project began generating positive EBITDA in Q1 2024. We expect our margins to grow as we move to full run rate, and we'll continue to increase EBITDA throughout 2024 and beyond. Additionally, we continue to seek and evaluate other opportunities in our Services business with existing and new customers as well as partners in Canada and the United States. Regarding third-party equipment, sales have been steady in the past 2 quarters and expect them to remain so throughout the year. As mentioned on our last call, we believe the macro level concerns of headwinds regarding analytical equipment sales have lessened. Therefore, we expect this business to be stable throughout the remainder of 2024. Regarding cloud systems investment at our High Field NMR product initiatives, we currently have 2 demonstration labs set up and working with full systems, including the superconducting magnet and our console, which we manufacture for Quad. There is one in Strasbourg and one in Zurich. There are plans to open more demo lots in locations such as U.K., China, U.S.A. and Calgary at our headquarters as we see more customer traction and contingent on available cash flow. In addition to the demonstration labs, there are several paying customers using our High Field products, and we have received positive feedback and testimonials from these customers. While the accounting structure between the 2 companies has changed, the relationship remains strong. Our team has been integral in developing the High Field NMR system. The 2 teams will continue to collaborate on an ongoing basis. Our Nanalysis sales team is authorized and trained to sell and service both the High Field system as well as separate modules in several territories. We remain very enthusiastic about the potential of High Field NMR product line, the associated market opportunity, and the relationship with Quad. We continue to own 43.5% of that company and hold 2 seats on the Board of Directors. In terms of medical imaging sales, we continue to make progress on completing a large customer MRI installation in Europe that includes our proprietary MRI console as well as third-party module. Regarding new sales, we are encouraged that several large projects are expected to be in the pipeline in the coming quarters, and we will provide more information on those as it becomes available. Overall, in summary, I am very encouraged by our first quarter results, and this is after a strong Q4. In the past, it has been typical for Q1 to be weaker than Q4 but not this time, and I believe this trend will continue. We are starting to demonstrate what our scientific instrumentation products and Services Company can look like in terms of operating results. I want to emphasize starting, we are not done yet. The changes we put into place are bearing fruit in both of our main businesses, benchtop NMR and Security Services. Our benchtop NMR business is doing well. We have good visibility, and we expect to continue to have an excellent 2024. Our advanced product offerings and potential collaborations will only bolster what our efforts have been to date. Our airport Security Services project has moved out of the rollout and will continue to grow into the full run rate with improving margins. We will look to optimize our workforce and leverage our trained services team. We look forward in the not-too-distant future to deploying our proprietary capabilities through this channel as well. Our overall financial objective remains to continue to drive down costs while increasing revenue steadily in 2024 and 2025, resulting in a sustainably profitable company. As always, I would like to thank our investors and our incredible employees for their support as we continue to execute on our mission and drive towards our brand vision. Operator, I'd now like to open up the call for questions. Thank you.
Operator: [Operator Instructions] Your first question comes from the line of Stefan Quenneville from Echelon Capital Markets.
Stefan Quenneville: And congrats on a great quarter. Really nice to see the substantial progress you guys made. Can I just first ask about, I guess, the CATSA business and I guess the force revenue, and that's a really big number, and it's been really helped you guys, I mean, a nice beat on the quarter. And you say how it's going to fluctuate. Can you kind of dive into that a bit? What's driving that number? Is that coming from the sort of special products -- special projects you've talked about that you want to implement with them and you have to get some parts to do that? Or is it parts going in sort of after the busy Christmas travel season? So you see a big bump up in Q1. Just maybe help me understand whether there's a seasonality to this or really is just sort of a random saying you can't really predict too well?
Randall McRae: Stefan, Randy here. Yes, it's -- there's a number of factors that drive that piece. It can be a consumption of parts as you say, in a busy season. It can be requirements from the customer that they want to stock up on certain items. There's minimum and maximum part levels that we ensure we're maintaining for the customer. So all of those pieces go in. Of course, if you've got projects, you can see more coming along as well. A bunch of factors there. I think it's key that looking at Q4 over Q1, in fact, we actually still had incremental improvement on revenue quarter-over-quarter even when we're moving those parts. So while it did give us a big boost here in Q1, it was really quite a good quarter even without.
Stefan Quenneville: Okay. And do you still foresee sort of sequential growth in the business through the balance of the year? Or because of the sort of operationally high parts, so that might not occur? Like you might have a sort of -- I mean, you pulled through some of that part of revenue from Q2 to Q3.
Randall McRae: Yes, I think that's entirely possible. So that was a very significant amount of parts revenue during this year. So we've broken it out so that it's very clear that the underlying services that we're providing are in the Security Service revenue line, and I would encourage everyone to take a look at the MD&A where we detail this out. And then, of course, we have product sales. So I think I would certainly focus on growing those 2 revenue lines through the year because that's what's really contributing margin to the business.
Stefan Quenneville: That's good and very helpful. Thanks for breaking that out actually. Makes it a little much clearer. So just talking a bit, moving to, I guess, the product revenue, again, a really strong quarter, much stronger than my expectations on Benchtop NMR, can you talk about what's going on there? You kind of highlighted a strong pipeline. Just what's going on with you guys on a more granular level? And maybe if Sean wants to chime in a bit. I don't know if you want to keep some of the details a bit private given the competitive nature. But talk a bit about the enhancements you're talking about in sort of towards the back half of the year on the products? And how do you think that's going to impact just your competitive dynamic in the market and what it might I do for sales and when we're going to see those products.
Randall McRae: Sure. So I'll handle the -- sorry, go ahead, Sean, take care of that one, and then I'll jump in on the financials afterwards.
Sean Krakiwsky: Sure. Yes. So we'll -- yes, in our industry, there are certain flagship performance metrics that are important when a customer makes a decision. And we feel like we've nailed it with 100 megahertz. And we made several important technology innovations, including receiving some United States patent grants with that product and we're going to be applying those to our 60 megahertz product to be able to tackle a certain segment of the market that we should improve in. And then in addition to that, we feel like it's going to open up certain partnering opportunities, and we know that based on detailed discussions we've had regarding partnerships. And so -- and we expect to start shipping commercially these enhanced versions over 60 megahertz by the end of the year. And then before I let Randall jump in, with regards to the continued steadiness of the benchtop NMR sales growth, it's just a matter of execution. There's nothing magic going on there. It's -- as we've discussed quite significantly in the past, we had some turbulence in our company because of acquisitions, and we've worked really hard to fix those, and now we just feel like we're executing correctly.
Randall McRae: Thanks, Sean. I don't know if I have a ton to add from the financial side. I'll just reiterate what we said in the press release, which was we've had significant year-over-year improvement in our Benchtop NMR over Q1 of 2023 of $1.3 million. And that's really a result of what Sean just mentioned.
Stefan Quenneville: Okay. No, that's great. And I just want to make sure I understand your guidance to on that business. You're targeting EBITDA breakeven for the products this year? Is that what you specifically said?
Randall McRae: The whole business. So if you look at our segment note in the financials, both the Scientific Equipment and Security Services segments did positive adjusted EBITDA in the quarter or income before other items. So now it's a matter of accelerating that a little bit further to cover our remaining corporate costs.
Stefan Quenneville: Okay. And then just finally, I don't know -- I know Sean talked about this in the past. I'd just like to hear a little bit more about it and I don't know what you can sort of share on the call. But in terms of those vertical partnerships with the enhancements to the 60 megahertz, which I think there's going to be, obviously, some performance enhancements as well as I imagine some -- maybe some price point enhancements to make it more appropriate for certain more widespread use. I'm not exactly sure. Do you want to just talk about what maybe those types of partnerships might look like when they might be announced? And then from the announcement of those types of deals when we might see real flow through to revenue in the Benchtop business?
Sean Krakiwsky: Sure. Yes. Thanks for that question, Stefan. So as most of you know, we currently sell our products into many different vertical markets like pharmaceuticals or petrochemicals or advanced materials or food. And then, of course, we sell a lot into academia as well. And so -- and that thought is because of the intrinsic nature of magnetic resonance being applicable to all these different vertical market applications. And I left it out but I'll mention another one, correct detection of illicit drugs where other techniques might miss a synthetic opioid, for example, because some clever chemists tweak a molecule, and it's not on an existing forbidden list but it's a deadly synthetic opioid, right? So magnetic resonance is particularly good at those types of applications. So the evolution of our company is, yes, to continue to sell our benchtop NMR products as sort of general purpose to analyzers. And our customers use our products today to analyze different types of things. But going forward, what we want to do is also focusing on particular verticals. So with branding and with applications, for example, we would go deep in the food vertical, right? And that product would be visibly clear that, that was a food analyzer and not an illicit drug analyzer and so on. So those types of vertical market initiatives would be with partners. Companies that have been in the food testing industry for 80 years and have deep channels in that particular vertical. So that's what I am -- that's I was referring to when I talk about these partnering discussions that have been ongoing and that we've come close a couple of times to doing deals like this. But just sort of -- I just haven't quite got over the finish line yet. And of course, we're going to continue to persevere until we succeed. And then what that will do is then you're going to see a big step change in our revenue and then growth from that new base of benchtop NMR. So that's why we would want to do a deal like that, and that's the impact that it would have on our benchtop NMR revenue.
Stefan Quenneville: And just to be clear, that's more of 2025 and beyond type of thing. Is that fair to say?
Sean Krakiwsky: Discussions are ongoing, and we're interested in doing these deals as soon as we can. I will say that it's likely that any deal along these lines would be contingent on these product advancements that we've been talking about for a myriad of reasons. One of them being that our current 100 megahertz product has incredible performance but it also has a very high price point. So some of these vertical market strategies require a product that has formidable performance, but also is, let's say, instead of having an end user price of $150,000, maybe has an end user price of sort of $85,000. So price is part of the consideration as well when you start talking about partnering and more specific branding and going deeper with larger volumes in a vertical. So 2025 is a reasonable expectation but I'm pushing these things every day.
Stefan Quenneville: Of course. Okay. That's great. And just one last little question on the medical, I guess, contracts you're working on that you think are going to come in the next few quarters. Can you give any -- a little more color on that as well?
Sean Krakiwsky: Sure. So our proprietary technology platform, especially the electronics and the low-level software like the software with all the mathematics and the physics in it, is in all of our products. It's in our Benchtop NMR products but it's also in our MRI products as well. And on the medical imaging side of our business, we use that technology as a stand-alone product that we sell. We call that our MRI console. But we also bid on projects that involve third-party modules, and we use our technical expertise to integrate those modules together. And then, for example, in this particular project in France, it's about a $1.2 million total sale. And there's been some milestones that have progressed along the way, and we expect that to complete -- or I expect that to be completed this quarter. There has been -- and I don't want to get into details nor will Randall but there has been some revenue recognized on that project already but there's still some remaining amount. In addition to that, there are other medical imaging sales that we expect to close this quarter. And I'll call them sort of lumpy in nature because of the price tags. They tend to be quite high. But nevertheless, they're part of our imaging equipment expertise and proprietary technology, and you'll hear more about those in the coming quarters. And we expect some evolution in that part of our business. I don't call it sort of our core business but it is some -- we're leveraging our core capabilities to generate that kind of revenue. And I anticipate that part of our business to evolve a little bit. And there are also the possibilities of some exciting partnerships in that part of our business as well going forward. And it -- and that's -- we go through that part of our business on our path towards our grand medical imaging vision, which I have articulated in the past.
Operator: [Operator Instructions] Your next question comes from the line of Christopher Birch from Canaccord Genuity.
Christopher Birch: It's Chris calling in for Tanya. Great quarter. I just have a few questions regarding the cost outlook for the ports, I'm wondering if you could provide an update on that, your outlook on that.
Randall McRae: In terms of our product sales, cost of goods sold?
Christopher Birch: Yes, like the material costs for the parts, yes.
Sean Krakiwsky: Chris, can you just clarify that? I'm still -- before Randall gives you an answer, can you clarify if you're referring to the parts flow through in our Services business or if you're referring to basically our COGS and our gross margins on our product business. Please clarify.
Christopher Birch: Yes, sure. So in the Q4 results, there was a mention of inflation still impacting the ports. And I'm just kind of wondering how do you see perhaps the impact of inflation going forward?
Randall McRae: Go ahead.
Christopher Birch: Yes, no, go ahead.
Randall McRae: Well, I think there was significant inflation through the post-COVID period, particularly with certain types of parts and things required with semiconductors and that type of thing, as we all remember. And because we use a weighted average costing model, the cost inflation around parts like that can have a long-lasting impact in our actual cost of goods sold. So as inflation comes down, we start to average down those costs of materials. Now inflation is cooling. It's still -- it's getting down towards kind of where we would expect benchmark to be. So we're likely expecting that to start to level off. But through the past couple of years, it was inflation at high rates. Certainly, it was impacting our average cost. And it's going to take some time for that average to come down.
Christopher Birch: Okay. In regards to the manufacturing capacity, I'm just kind of wondering, currently, what's your estimated percent utilization of your manufacturing capacity for your Scientific Equipment?
Randall McRae: Yes, it's a good question. I think where we're at today, we've got -- we worked hard over the last year to get our manufacturing capacity in line with our kind of revised expectations of product manufacturing and sales. We've got capacity right now that I think is well lined up with our forecast as well as in terms of reasonable utilization and hours available. But with enough ability to -- enough ability for us to be able to expand our capacity if we do have a particularly good quarter or as seasonality impacts, we take all of this into consideration when we're planning our workforce.
Christopher Birch: Okay. Sounds good. And my last question is regarding your cost initiatives. I know you like your company is really focused or laser focused on reducing, I guess, overhead and becoming more efficient, and there was something in the -- any documents about you're beginning an additional cost reduction plan in the Scientific Equipment segment. So after accounting for that, like how close would you say that your company is to achieving like the optimum resource level?
Randall McRae: I think we're getting closer. I think there's still work that we want to do, which is why the plan is ongoing. And it's not just necessarily about resources to, but looking at overhead, looking at how we run the business to make sure that it's -- every dollar we spend is contributing value back. And as we continue to go down that path, the goal ultimately is to push those margins back up to historic rates. So it's close to as we possibly can. So we're continuing to work on that. We're analyzing every day, whether it's efficiency, whether it is utilization, as we just talked about or whether it's where are we putting our overhead dollars. All of that continues to be on the table and something that we look at closely, and we're still not -- still working through it, and still working towards our end goal.
Christopher Birch: Okay. That's great. Yes, that's all for me. Congrats on the great quarter.
Randall McRae: Thanks very much.
Operator: There are no further questions at this time. I will now turn the call over to Nanalysis' CEO, Sean Krakiwsky. Please proceed.
Sean Krakiwsky: I'd like to thank everyone for joining the call, and we're really excited about our business going forward. And we look forward to the next opportunity to talk about our business with you. So thank you very much, and have a wonderful afternoon and evening.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.