NSCIF - Nanalysis Scientific Corp. (NSCIF) Q1 2023 Earnings Call Transcript
2023-05-25 21:25:23 ET
Nanalysis Scientific Corp. (NSCIF)
Q1 2023 Earnings Conference Call
May 25, 2023, 5:00 PM ET
Company Participants
Matthew Selinger - Investor Relations
Sean Krakiwsky - Founder and CEO
Randall McRae - Chief Financial Officer
Conference Call Participants
Stefan Quenneville - Echelon Capital Markets
Presentation
Operator
Hello, everyone. And thank you for joining the Nanalysis First Quarter 2023 Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]
This call is being recorded today, May 25, 2023. I now have the pleasure of handing you over to your host, Matthew Selinger, Investor Relations. Please go ahead.
Matthew Selinger
Thank you, Operator. And welcome everyone to the Nanalysis Scientific’s first quarter 2023 conference call.
Before we begin, I’d 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, 2022.
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 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 such forward-looking information as a result of new information, future events or otherwise, except as expressly required by applicable law. So for more information, I do encourage everyone to review our public filings and press releases, which are posted on the SEDAR filing system at www.sedar.com.
So on the call with me today are Nanalysis Founder and CEO, Mr. Sean Krakiwsky; and Nanalysis CFO, Mr. Randall McRae.
So, with that, I would like to turn the call over to Nanalysis CFO. Randall?
Randall McRae
Thanks, Matthew. It’s a pleasure to join and interact with everyone on the call today. I am first going to dive into the financial results for the quarter ending March 31, 2023. All amounts are referenced in Canadian dollars.
Financial highlights for the three months ended March 31, 2023, the company reported consolidated revenues of $4.7 million, a decrease of $880,000 or 16% from the comparative period in 2022. This includes $3 million in product sales and $1.6 million of service revenue related to security services.
Gross margin on product sales was 40% for the three months ended March 31, 2023. This is due to working costs of $135,000 related to the same customer service issues discussed in the December 31, 2022 financial statements and earnings call, higher weighted average costs due to post-COVID inflationary increases and supply chain issues affecting raw material pricing, as well as lower utilization of fixed manager and labor. Management is considering a variety of options to manage these cost increases and mitigate or reduce their impacts going forward.
Service gross profit margins in the quarter were negative 53% as we accelerated the training schedule for the CATSA project that began expensing wages related to airports that were in service. Wages related to airports not yet in service continue to be deferred to prepaid expenses.
We also ramped up our training program for security service employees in conjunction with taking on more airports, incurring $971,000 of one-time training costs for new CATSA project employees.
We expect our ongoing training costs to manage employee turnover to be far less than the initial training investment required. As we have said previously, we do expect service gross profit margins to improve significantly as the airport security project is phased into full capacity.
Loss or income before other items for the three months ended March 31, 2023, were a loss of $3.5 million versus $210,000 of income compared to the same period last year. The company reported a net loss for the three months ended of $4.3 million as compared to the three-month loss from March 31, 2022, of $1.4 million.
The company had cash on hand of $1.8 million, an undrawn available credit facility of $2.2 million, working capital of $4.1 million and undrawn government contribution funding of $2.2 million as of March 31, 2023.
Subsequent to the quarter, on May 3rd, the company closed an upsized $4.1 million private placement. We announced the offering April 21, 2023, that was oversubscribed and upsized from $3.5 million and included insiders and directors. The purpose of this private placement is to bolster the company’s balance sheet as we enter the final stages of the CATSA project rollout.
Additionally, I’d like to take a moment here and discuss our future working capital and cash management going forward in 2023. As mentioned in our press release, the company recently signed a non-binding term sheet for a new two-year $15 million senior secured operating and credit facility with ATB Financial.
The new credit facility contemplated by the term sheet will, upon and subject to the execution of definitive credit documents, replaced the company’s existing senior on-demand secure credit facility with another lender. The new facility is expected to provide improved financial flexibility to help the company manage its operations and current growth initiatives.
As we mentioned on our last call, when we entered into our current operating line with a major Canadian bank, it did not take the CATSA contract into consideration, rather it was our current business without CATSA. The company expects this new facility will better fit the needs of Nanalysis today. With these additions and changes, we feel we are building a strong financial base that will be the foundation for the company’s future growth.
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. It has been just a short time since we last spoke, going over our accomplishments for the previous year. On this call, I would like to talk about Q1 2023 and what will be coming for the rest of this year and beyond.
The first quarter revenue did not meet our expectations and this was mainly due to our hardware sales from benchtop and third-party equipment sales through our subsidiary KPrime. Regarding benchtop NMR, we are continuing to work on integrating KPrime and Nanalysis sales organizations for the benchtop NMR business and we believe that the changes made are consistent with the long-term health of the sales organization.
The challenges we faced in 2022, which were many in our benchtop NMR sales organization continue to present issues to us in 2023. This was not entirely a surprise to us as we anticipated that our lead generation in the middle of 2022 would suffer with the turnover we experienced, though, the level of impact was higher than we anticipated.
Despite Q1 not meeting our expectations, we remain very confident that the restructuring initiatives we implemented in our sales organization in the second half of 2022 will take effect through the remainder of 2023.
We may also be experiencing a temporary slowdown caused by slowing economic growth worldwide. We will continue to monitor this situation closely. We continue to explore application and value-added distribution deals to unmet revenue from direct sales.
As mentioned on the last call, we are pursuing several vertical market centric partnerships in benchtop NMR that will contribute to future growth, including initiatives to create regulatory tailwinds for our products.
Historically, benchtop NMR has not had regulatory drivers in industry as is the case for other types of benchtop instruments such as infrared spectrometers and various chromatography techniques.
NMR has been seen as too complex, expensive and physically large for widespread adoption in industry. This is changing and Nanalysis is influencing this change. Our applications department is driving this initiative for us and I expect great things from this group in 2023 and 2024.
Regarding third-party equipment, 2023 has started out slower than what was experienced in 2022 and the company believes that this too is a result of customer’s concerns regarding global economic outlook in 2023. We are optimistic that this will recover by the end of the year.
Regarding the investment we made in Quad Systems, a Swiss high field NMR company in March of 2022. As we mentioned on our last call, the company debuted and presented the full 400 megahertz high field NMR product in collaboration with Quad Systems at the prestigious ENC Conference in Monterey, California.
The company expects Quad’s sales to pick up and gain momentum in the second half of 2023. We will be working in close partnership with Quad Systems with our sales organization and our installation organization on their go-to-market strategies.
In terms of medical imaging sales, our subsidiary in France, RS2D began work on a large preclinical MRI project during the first quarter, but has not yet reached the project milestones required under IFRS to allow for revenue recognition in Q1 2023. It is expected that revenue recognition on this project will begin later this year.
Regarding our security services business, in November of 2022, the company began providing service under the CATSA airport security contract and continues to execute its phase-in plan for the entire project.
During the first quarter, the company has continued the accelerated phase in, and as of today, we have a presence in 44 airports and are growing that number. Complete countrywide rollout is expected to be completed by September of this year. We are currently billing the customer material and growing amounts every month.
We are now 10 months into this contract and feel very comfortable about where we are, the rollout of the final phases. We have been able to model the past several months well and have good visibility on how to get the project to profitability.
This contract is going to be profitable for us, give us a stepped-up annual revenue base and provide us with a large service organization that we will need and be able to leverage going forward for our other businesses. Our client, CATSA, has been very happy with our work and the relationship with our company thus far.
Keep in mind that while this is initially a five-year contract, after the first phase-in year, it can be renewed for two additional five-year terms as well. Additionally, we continue to get referrals for additional contracts like this from our customer.
We do foresee that with a fully trained workforce, there will be the opportunity to leverage them and service additional projects. By now, most of you have probably heard me talking about our strategic vision of becoming a vertically integrated scientific instrumentation company, which we are achieving by acquisitions, as well as organic growth.
Through our acquisition strategy, we have grown our business segments and diversified the company. In doing so, it will enable us to smooth out any variability and lumpiness in quarter-over-quarter revenues going forward.
We are much better positioned today to withstand any macro or economic headwinds that may arise. Contracts like CATSA are going to give us consistent base level revenues for years to come.
That being said, out of an abundance of caution in light of possible global economic slowdown, the company has begun a cost reduction program, which it will continue until it sees headwinds subside.
I have full confidence that the medium- and long-term business prospects for our company remain very attractive, and therefore, our cost reductions will have a stay the course in nature to them and only be met to conserve cash in light of potential lowering short-term growth numbers.
In closing, I am very proud of what we are building here at Nanalysis. The entire team is working together to succeed at our mission and vision. We will continue to serve our customers in the security, pharma, biotech, food, energy, advanced materials, petrochemical, healthcare and education markets with imaging and detection products and services.
Going forward, you will see us continue to make advances in our technology differentiation capabilities, while managing supply chain risks. I continue to believe that 2023 will be a transformational year for Nanalysis as we digest our acquisitions and move forward as a multi-segment full service scientific instrumentation company.
Strategic goals for the rest of the year are; establish vertical market partnerships for benchtop NMR that will contribute to revenue growth; make progress in creating regulatory tailwinds for our benchtop NMR products; get the CATSA project to cash flow positive in the fall of this year; acquire the remaining 57% of Quad Systems AG and leverage the synergies and cross-selling opportunities between high field and benchtop NMR; continue to make steady progress on our MRI strategy; and position ourselves for an uplift to the TSX Big Board in Toronto, which we expect to initiate in 2024.
I want to thank our team around the globe for all that they do every day to our shareholders and stakeholders for their continued support.
Operator, I would now like to open up the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from the line of Stefan Quenneville from Echelon Capital Markets. Your line is now open.
Stefan Quenneville
Hi, guys. Thanks for taking the questions. I guess the first thing, could we -- I appreciate the color on all the things that are going on different business lines, but could we do a bit of a deep dive on the benchtop NMR business. I mean it was a pretty sizable miss on the quarter to say the least. Can you tell me what’s going on there, how much is it due to you guys maybe taking your eye off the ball and focusing on CATSA, how much is tied to just general economic challenges and in what sectors or end markets are you seeing those challenges? And maybe just a little bit of guidance on where you think that business is going to go this year, I mean, it’s one thing that it’s slowing down, but to actually see it contract is a bit surprising. So maybe a little more color would be appreciated?
Sean Krakiwsky
Thanks very much, Stefan. This is Sean. So I think it’s a combination of a lot of the things you mentioned. We definitely are seeing some tentativeness with regards to customers pulling the trigger on purchase orders where the sales cycles seem to be dragging out a little bit longer than what we are used to. So we attribute that to some macroeconomic conditions.
And yeah, unfortunately, we are still suffering from some execution challenges that are related to some significant turnover we had last year. I mean, we did recover from sort of the direct consequences of that pretty quickly, if you remember. We had a terrible Q2 in 2022 and then we bounced back fairly well with strong Q3 and Q4 numbers.
But what we are seeing here is a reverberation or an aftershock of that and really not sort of doing what I consider to be some of the fundamentals when it comes to sales pipeline replenishment and that sort of thing.
And so -- and yeah, you mentioned one of the other things, which is correlated to that execution issue is the CATSA contract has taken a lot of our resources and it has affected other parts of our business. There’s no question about it.
When I signed the CATSA contract, I knew it was taking risk and -- but I think the risk is worth it and for anybody that’s sort of interested in the long-term prospects of our company [Audio Gap]
Randall McRae
This is Randall McRae, CFO. Did we lose Sean, Operator?
Operator
Yes. He got disconnected from the call.
Randall McRae
Okay.
Operator
Please hold, I will get him back.
Randall McRae
Let me jump in here, and what I will say is, with regards to long-term prospects, Stefan, we are still seeing good lead generation now that we have established or reestablished is probably a better term our sales organization. So that part of it is looking good.
The question around tentativeness of customers is, obviously, we are not economists, but when you look at the broader macro conditions here with regards to reduced transportation sector revenues, with regards to commodity prices, with regards to yield curves, all of that does present a picture that we need to be wary of in terms of potential headwinds from a macro perspective. Does that answer your question?
Stefan Quenneville
Well, I mean, yeah, it’s very general. I mean it’s a pretty big miss in the quarter and the base NMR business is one where we are expecting reasonable growth in the year. I mean for it to contract is surprising. I mean do you expect the business to, I mean, obviously, it’s not going to grow, it doesn’t sound like it’s going to grow fantastically this year, but do you expect a meaningful rebound in the next couple of quarters or you expect a soft Q2, Q3, like, what -- maybe give me a little more your best estimate on how things are looking for the next couple of quarters?
Randall McRae
Yeah. I think with what I am seeing in the pipeline, that gives me optimism. But I would say, given the lengthening of our sales cycle that we are starting to feel, I would suggest it’s probably going to be more back loaded into the second half of the year.
That’s where I see things right now, which is part of why we are taking measure to -- measures to address that in the near-term to do what we can that’s within our control to assist with that or to mitigate those risks. But, yeah, I would say probably looking more at the second half of the year.
Stefan Quenneville
Okay. Great. And then on the RS2D project, it sounds to me like there’s a, I mean, another part of the miss is that, you guys have been doing work there, but are not getting -- not able to recognize that. Can you kind of size that to help us understand what kind of revenue that sort of show up next quarter or in the third quarter that sort of didn’t show up this quarter or just help me understand...
Randall McRae
Yeah. I mean it’s…
Stefan Quenneville
…the size of that?
Randall McRae
It’s about $1 million. It’s about $1 million and we expect to be complete the project within the calendar year. So…
Stefan Quenneville
Okay.
Randall McRae
… in terms of the exact breakdown of that, that really depends on the kind of esoteric accounting rules around contract revenue recognition under IFRS. You have to hit all -- certainly you have to establish your milestones, hit your milestones and then you can recognize a proportion of that. But in terms of what I am comfortable saying is the aggregate amount and our expectation that project will be delivered and complete within 2024 -- 2023, excuse me.
Stefan Quenneville
Okay. And then just finally on the CATSA rollout. Again, this is the things that sort of making the difference here. You have a presence in 44 airports. How do you -- from here to sort of the end of September, how is that ramping? Is it a kind of a linear every couple of weeks, we are going to see more airports coming on or is it -- maybe describe the ramp -- the shape of the ramp up over the next two quarters here? Is it straight line or is it sort of, again, more Q3 loaded or how is that looking?
Randall McRae
No. I would say -- so it’s an interesting question. It’s an accelerating ramp. So the kind of metric that I’d like to point out is, at the end of December 31, 2022, we were -- we had a presence in nine airports. And by the kind of the release date for Q1 we were 39 and then here today we are at 44.
So it’s an accelerating pace of airport entry, which is not shocking. Obviously, the start of the project is higher and plan the rollout, then get everybody trained and certified on the necessary equipment. Hence, why we have seen the substantially one-time cost of $1 million of training and training related expenses in the quarter and then get active in the airport.
So we expect to see continued accelerating ramping basically until we hit the busy summer travel season, and then we will -- it will be a little more status quo through that timeframe and then we will finish off that last bit in Q3 or towards the end of Q3.
Stefan Quenneville
Okay. Well, that’s it for me for now. I will jump back in the queue.
Randall McRae
Thanks.
Sean Krakiwsky
Yeah. Thanks, Stefan.
Operator
[Operator Instructions] There are no further questions at this time. Oh, we do have another one question from Stefan Quenneville from Echelon Capital Markets. Your line is now open.
Stefan Quenneville
Yeah. No. thank you. I don’t want to hog the call but if no one has any questions. I also wanted to ask you about potential vertical partnerships on the benchtop side. I know that’s something you guys have been working on, and obviously, that’s something that could help accelerate growth in that business. And I can imagine again with your focus on CATSA maybe some of those opportunities or projects or partnerships may have been sort of, I am certain sure not put on the back burner, but maybe just hadn’t gotten the right focus. Where are you on that front, and yeah, how is that looking or that sort of type of strategic opportunity pipeline, how is that looking?
Randall McRae
It’s looking positive. There’s always some in the queue that we are in discussions on and working with people on. And what we try to do is, work with partners who have specific vertical expertise, so that -- and an established reputation and customer base. So they have got great market presence in an area that we feel our instruments could lend a lot of value.
And I think tied to that is what we talked about with regards to regulatory tailwinds. If you look at the historic development of scientific instrumentation, when you start to get that regulatory stamp of approval that something is a standardized testing methodology, it really accelerates the industry adoption of particular piece of equipment.
So not only are we working in verticals, we are working with an eye towards that standardization and having our instruments become part of that -- having benchtop NMR become part of that standardized adoption.
So we are always working on things, we are working on some as we speak and we are hopeful that a partnership of this nature would lend itself towards great growth for our company, and generally, market penetration for benchtop NMR into new verticals where it hasn’t always been the best testing methodology of choice historically.
Stefan Quenneville
Great. That’s it for me.
Randall McRae
So maybe to be a little less generic to Stefan, that’s something that we are actively working on and is one of our goals as we said on the earlier part of the call here for 2023.
Stefan Quenneville
Obviously, you think that there might be some announcements sort of in this calendar year, is that reasonable thing to say?
Randall McRae
Like I said, that’s -- our goal is to have something, of course, there’s many, many things you need to do, but we are actively working on this to hopefully have something or have a goal, not necessarily an announcement, but have a goal to enter verticals and different verticals within the year.
Stefan Quenneville
Great. That’s it for me. Thanks.
Operator
There are no further questions at this time. I will now hand over to Mr. Sean Krakiwsky. Please continue.
Sean Krakiwsky
Thank you very much. I apologize to everyone. I am in Europe right now attending investor events and my call has dropped a couple of times. Again, I apologize for that. The reception hasn’t been that great on my cell phone.
But, yeah, I’d just like to remind everyone that our usual early morning conference call targeted at European investors for tomorrow morning has been canceled, and again, that’s because I am with probably 95%, 99% of those particular investors at a two-day event and we will be answering their questions directly.
So I’d like to thank everyone for participating on the call. I look forward to the next opportunity for Randall and I to speak with everyone. So have a wonderful evening and we will talk to you soon. Bye-bye.
Operator
Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.
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Nanalysis Scientific Corp. (NSCIF) Q1 2023 Earnings Call Transcript