Nanalysis Scientific Corp.

Good afternoon, my name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to the Nenalysis second quarter 2022 conference call. All lines have been placed on mute to prevent background noise. After this speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. And if you would like to withdraw your question, please press star followed by two. Thank you. And I would like to turn the conference call over to Matthew Selinger, Investor Relations. Please go ahead, sir.

Thank you, operator. And welcome to the Analysis Scientific second quarter 2022 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 ensue of inherent risks and uncertainties that could cause actual results to differ materially from our responses. Certain material factors and assumptions considered and applied in making these forward-looking statements. These risk factors are included in our filings for the year ended December 31st, 2021. 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, 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 only as of today, and Analysis 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 additional information, I encourage everyone to review our public filings and press releases which are posted on the CDAR system at www.cdarsedar.com. On the call with me today are Nanalysis founder and CEO, Mr. Sean Krakuski, and Nanalysis interim CFO, Mr. Randall McRae. So with that, I would like to turn the call over to Nanalysis interim CFO, Randall McRae. So Randall, please go ahead.

Thank you, Matthew. It's a pleasure to join and interact with everyone on the call today in my new role as interim CFO of Nanalysis. While I'm new to this position, I'm not actually new to Nanalysis as a company, as I've worked with them in a consulting basis over six months prior to my joining and know the company quite intimately. I've been impressed with the company's current business, growth prospects, and vision to disrupt the NMR and MRI space. I jumped at the chance to join the company in my current role when given the opportunity. My goals since joining the company have been to work with Luc Caplet to ensure a smooth transition, as well as to build out my team and systems to support an analysis's growth trajectory. Some of our business segments, like the CAATSA contract, are going to require advanced ERP systems to ensure proper controls and management, the implementation of which has already commenced. With that said, I would like to turn to the financial performance of the quarter. All amounts referenced are in Canadian dollars. I'm happy to report For the three months ended June 30th, 2022, the company reported consolidated revenue of $5.2 million, an increase of $844,000 or 19% from the comparative period in 2021. The increase in revenue is due to revenue added via acquisition of the K-prime operating segment, offset by slightly lower revenue in analysis and RS2D, gross profit for the three months ended June 30th, 2022, was $3.2 million, a margin of 62%, compared to gross profit of $2.9 million and a margin of 67% for the three months ended June 30, 2021. As discussed on prior calls, we anticipated a bit of margin erosion due to the inflationary pressures on our cost inputs. We continue to evaluate pricing. However, due to a large backlog of sales, the opportunity to increase prices has been temporarily stifled. The company's net loss for the three months ended was $947,000, as compared to the three-month profit in June 30, 2021, of $1.2 million. The increased loss was due to higher costs, specifically sales and marketing expenses, increased general and administration expenses, and increased research and development expenses, both in the analysis segment and from new acquisitions. Analysis has also continued to invest in growing internal processes and structures to support anticipated future growth. As of August 25th, we have 19 100 megahertz units in our production queue worth approximately $2.6 million. We're pleased to announce that as of June 30th, 2022, the company had cash on hand of $12.3 million, an undrawn credit facility of $6.5 million, working capital of $13.5 million, and an undrawn government contribution funding of $5 million as of June 30th, 2022. I'm very confident that we have a strong financial base for an analysis growth. With that, I'd like to turn the call over to our founder and CEO, Sean Krakuski.

Thanks very much, Randall. Welcome to everybody, and thanks for spending time with us today. As you know from our last interaction, much of our last call was focused on the recent win of the $160 million service and maintenance contract. with the Canadian Air Transportation Security Authority, or CAFSA. Clearly, this contract is quite meaningful for the future growth of the company, and I will comment on it in detail a bit later in my remarks today. First, I would like to start off by discussing our Q2 financial performance, which, while we are still experiencing significant year-over-year growth, was not where we have been historically and not where we would like it to be. We have been able to drive triple-digit growth for the past few years, and I believe we can get back on that trajectory in the near future, but we have fallen short of that objective thus far in 2022. There are several reasons for this shortfall. Randall alluded to some of them, but I'd like to talk about a few more in detail and ensure investors that we will get back on track. While pursuing the CAATSA contract, which was signed on May 25th of this year, it was an all hands on deck situation and turned out to be quite distracting, requiring resources from throughout the company, especially from our VP of sales. Also, as soon as we won the contract, we began work associated with it, which includes coverage of all 81 airports in Canada. This is no small undertaking. and I am happy to report that we are currently on schedule with this project. This was all happening while we were trying to integrate our Nanalesis Benchtop NMR sales team with K-Prime shortly after the closing of the acquisition. As a result of this very important but quite hectic activity, Our top line results in Benchtop NMR and K-Prime third party product sales did suffer. We have implemented a plan to rectify this situation. The acquisition of K-Prime, which now serves as our sales organization, has brought to an analysis a significant change in culture when it comes to the philosophy and structure of sales. For example, we have changed the compensation structure of sales reps to include higher quotas and smaller territories. Additionally, we have redefined the role of a sales rep to be less technical and more focused on closing business. The technical aspects of closing a benchtop NMR sale will now be undertaken by our product and application experts. which have tremendous knowledge about the customer's technical product requirements. These product and application experts used to be strictly a cost center in our company, but are now being included in the compensation structure directly associated with generating revenue. This change in sales philosophy and structure did, in fact, result in some personnel turnover of NMR sales professionals in Q2 2020. which in turn did negatively affect revenue, but I believe will be the best for the long-term health of our sales organization going forward. In this context, we are implementing a plan to increase our desktop and our sales organization to 22 sales reps throughout the United States, whose main job is to turn over more rocks, finding more qualified leads, and strengthening our sales pipelines. The main job for these people is to close business, not to engage in scientific discussions with customers. These 22 sales reps will be supported by our product and applications experts, who will also be compensated for contributing to the closing of sales. The founder of K-Prime, my colleague Cam Lynn, often says to me that sales is a team sport that needs to be played efficiently so that we can scale our sales organization, and I'm fully supportive of this approach despite the short-term growing pains we are experiencing. So with these changes that we are putting in place, I'm confident that we're going to see a significant rebound in benchtop NMR sales and K-prime third-party product sales in Q3, and that the remainder of 2022 is going to be quite strong. I'd also like to talk about other aspects of our business, starting off with the quad systems acquisition that is publicly announced. That acquisition is for going upmarket with high-field NMR systems, and those high-field NMR systems have several modules associated with them. We have started generating revenue from some of those modules, but we've also experienced some delays and the completion of other modules. We remain confident that we will close out the year with quite a bit of momentum associated with Quad Systems and that we will have excellent visibility on the contribution to 2023 revenue by the time fourth quarter closes. With regards to our MRI group, we remain quite active there, quite happy to To let everybody know that in Q2, we closed a million-dollar medical imaging system sale. We recently received notice that we have also won a $1.1 million contract for another medical imaging sale to a university in France. On the technology front and on the sales and installation front, we remain quite active there in a way that is fully consistent with the strategy that I've talked about with you many times over the years. Also, we continue to make sure that our manufacturing capabilities are incrementally improved so that we're positioned to satisfy strengthening demand going forward. Yes, it is acknowledged that Q2 has been a bit of a weak spot for us, but we don't see that as being indicative of any long-term trends. And as I mentioned before, we expect to see significant rebound of revenue in Q3. In particular, with regards to manufacturing, we acquired a state-of-the-art five-axis machining center. which is important for reducing our costs as well as facilitating extra capabilities with product performance. We also acquired a state-of-the-art wire EDM machine, which allows us to make parts that we couldn't make before that we outsourced. So very proud of the continued investment and the growth of our business in the context of our manufacturing capabilities. As I mentioned before, I'll talk a little bit more about the CAATSA project. And I'm happy to report that we're on track with that. Cam Lin, the founder of K Prime and his team have been tremendous in making sure that the customer is happy with our progress there and covering all 81 airports, starting off with Calgary and Edmonton, which are sort of our home airports. And we expect to be generating a material amount of revenue towards the end of the year associated with the CASA project. And then towards the Q1 and Q2 of 2023, we expect to be ramping up and approaching the maximum amount of billing that will occur under that contract, which is over $2 million per month. So all in all, our business is on track despite a little bit of a short-term blip. And I also want to invite everybody to come talk to me more in detail about that. We're having an investor barbecue at our headquarters in Calgary this Friday, which will start at about noon. It's kind of becoming an annual tradition. And like I always like to say to investors, we have a lot of transparency in our company. We invite... scrutiny and questions from shareholders. And this Friday will be a great opportunity to mingle with employees on seeing a lot of the new things that we have as we evolve our company. So please RSVP to the official email that went out to all shareholders last week. In closing, I would like to emphasize that our very talented and committed management team is constantly course correcting as needed. figuring out new ways to drive growth, and confidently moving towards our vision of building a fully vertically integrated global scientific instrumentation company serving customers in the security, pharma, biotech, food, energy, advanced materials, petrochemicals, healthcare, and education markets with imaging and detection products and services. The company will continue to expand product lines, expand direct sales, service, and channel management capabilities worldwide, and will also strengthen technology partnerships as well as develop important supply chain risk mitigation and technology differentiation capabilities as the geopolitical landscape evolves, ensuring continued value creation for shareholders. Operator, I would now like to open up the call for questions.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, simply press star followed by two. And if you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you do have a question. And your first question will be from Stefan Kenvick. at Echelon Capital Markets. Please go ahead.

Hi, guys, and thanks for taking the question. Kind of a, you know, definitely a tough quarter and not necessarily the direction we were expecting with the NMR sales. Can you talk a bit about how Q3 is shaping up? Whether the sort of production snafus that... you had previously impacted those sales as well. And maybe talk about any weakness and end markets that may have impacted sales beyond just, you know, the Salesforce impact you were sort of citing.

Hi Stephan, thanks very much for the question. This is Sean, the CEO. We're two-thirds of the way through Q3 and things look very good. In previous years, Q3 has been a weak point for us, but we don't see that weakness this year. One of the things that has recently started to change is that physical conferences are coming back. I had a call today with basically the quarterback of our benchtop NMR sales group, Dr. Matt Zamora. He's at a very important trade show in Chicago, and he said that interest in our products was higher than he's ever seen before. So that's just a little anecdotal evidence that things are good. In terms of the production side on the 100 megahertz, I'm confident that we're going to ship somewhere between 18 and 20, 22 hundred megahertz units for sales in Q3. Um, and then in Q4, um, you know, I'm confident that in terms of manufacturing, we're going to be basically be able to able to manufacture 10 units a month of the, on the a hundred megahertz side, which is, um, which is an objective that I've talked about quite a bit. So we're on the verge of our, uh, of really not having to talk about constraints and a hundred megahertz manufacturing anymore. So those are positive signals. The way our quarters tend to be is we have a lot of purchase orders that come in right at the end of and towards the quarter and especially with our 60 megahertz where we're ready to ship them out right away. But unfortunately, we had several sales reps that weren't really happy with the new type of compensation structure that we implemented and they basically checked out, you know, a couple months before quarter end and that did really hurt us. So in terms of the market opportunity and market demand, I'm not seeing anything except for strengthening demand there. So really it's just been a matter of execution on our side. And again, it comes back to this $160 million contract that we won and that really consumed a big part of our management cycle. So, you know, happy to elaborate more if you want to send me in a little bit of a different direction Stefan but really that's my answer to the question and again Q3 is looking very good and Q4 is always our best quarter of the year and that'll be no different in 2022 So do you feel confident in the next couple quarters that you're going to be hitting that kind of

you know, doubling of sales that you sort of were at a cadence and you feel that it's more prudent to think that it's, I mean, you're right. I mean, if you put this in the context of winning the $160 million contract, you know, yeah, bad quarter is worth taking when you've made that kind of contract with it. I don't mean to be so dour, but do you feel confident in that sort of cadence? And I think people on this call will understand if, you know, If you're growing at 80% or 85%, I don't think people are going to be particularly upset when you layer on top of that the cats will win, given that that takes quite a bit of focus for a company your size. I just wanted to understand that Q3, this is really an aberration this quarter. and things are definitely on track for Q3 and Q4. And then just a sort of follow-up question, have any salespeople been let go of or quit given the realignment? Just maybe a sense of the number there, if you can disclose that.

So yeah, I'll just reiterate that we are very confident that we're going to resume the expected trajectory, the growth trajectory in Q3 and Q4. And, you know, we see Q2 as a sort of an unfortunate anomaly. But yeah, again, the, you know, from my perspective anyways, the biggest cause for it is that when, and I'm answering your second, the second part of your question now, Stefan, we did have for the first time in our company's history, we had some turnover, employee turnover in the form specifically of sales professionals resigning because they didn't like the new direction that our new VP of sales was putting us on, which I totally agree with his new direction. And again, I mentioned some of the characteristics of it. So for example, you know, put, putting higher quotas on our sales reps and giving them smaller territories. In other words, they need to be more efficient. They need to produce more. These are all characteristics of a larger company's sales organization rather than the sort of culture of a tech startup, right? Which, you know, in analysis in the past, we would think of ourselves as sort of a tech startup, right? Whereas K-Prime has brought the DNA and culture to a company of a large organization's sales and compensation structure, which we need to have going forward. So I wholeheartedly agree with it. And yes, we did lose a couple of sales professionals, but we have replaced them. And then we've also augmented the sales organization with, as I mentioned before, these additional 22 commission-only sales professional who are professional analytical scientific instrumentation people. They're not full-time employees of an analysis, but they're well-known to us through the K-Prime network, largely of Agilent resellers. And their job, again, is to strengthen the sales pipeline and close business. And we have all kinds of product specialists and application specialists experts that can support them on the parts of the sales cycle that that entails. So, I mean, we've gone from four salespeople covering the United States now to three, but an additional 22 sales reps that are already starting to provide quotations to customers and work with our application specialists. So, I think it's the right thing to do. It's something that Cam and the rest of the team from K Prime, including our VP of sales, have been sort of trying to evangelize me on for a while. And I think it's going to be great for the company going forward and that you'll see the early results in Q3.

Okay, great. And maybe I'll finish on a more positive sort of note and sort of an upside surprise. The MRI contracts that you guys have been winning, I know you've, kept your cards pretty close to your vest on your emerging MRI business. Are you ready to maybe tell us a bit more about how that's going, seeing these sort of meaningful purchase orders coming out here? And maybe at a higher level, talk to us about how that business is shaping up and going to be growing from here on out.

Yeah, so we're doing what we said we were going to do on the MRI side, which is remain very active, generate meaningful revenue. So it's not the largest chunk of business in our company by any means, but it is millions of dollars per year. We continue to develop our proprietary technology, which is fully synergistic with our NMR technology. and working on partnerships that will one day turn into acquisitions, which will catapult us into the human medical imaging side of the business. So very active and very proud of our group there. We probably will start to do a little bit more PR about some of our contract wins in that area. And our strategy all along has been between now and sort of the end of 2023 to just gradually and steadily ramp up our discourse on that part of the business. And then again, with acquisitions that will resume probably not mid-2023, we need to see the equity markets kind of slow straighten out a little bit more. But by the end of 2024, my plan as CEO is to resume acquisitions and specifically to get into the human medical imaging side of the business. So really, that was just a long way of saying nothing's changed except we've made the progress that we said we were going to make.

Well, great. That's all for me. Thanks, guys. Thanks, Stephan.

Next question will be from Brandon Austin at Venator. Please go ahead.

Hey, Sean. How's it going?

You know, I've been better, but things are going very well and great to hear from you, Brandon.

All right. Well, we'll see what happens tomorrow, but I guess with people listening, it's probably a good idea to just get everything, all the questions asked rather than to take things offline. So everyone's on the same page here, but yeah, So let me just go through my list here. Some of this was a little repetitive with the analyst. So the cash, the $12 million in cash, is that unencumbered cash? That's your cash? That's not including GC Quad's books or not GC Quad? Sorry, Quad. Quad Systems in Zurich, yeah. Yeah.

Yeah, so it does include, and I'll maybe ask Randall to kind of compliment my answer after I say a few things, but it does include the cash in quad. And so in that sense, a portion of it is encumbered. But remember, we also have an OEM contract with quad systems. And so that's the way that we get access to that to that cash is when they place an order for our electronics console, they pay us for that. So it does include the cash in Quad Systems. Randall, you want to add some color to that? How much is yours? Randall, would you like to add some color to that and give Brandon some specific numbers?

Absolutely. Hi, Brandon. How are you doing? Good, good. Unencumbered, $6.8 million at Q2.

Okay, $6.8 million. Okay, so there's a decent buffer there. And how many, when I'm looking in the quarter, the $3 million in revenues from analysis, how many units did you move? Like I know when the first quarter call came out, In the first quarter, you moved 10, 100 megahertz units, I think. And then we talked a bit about an order backlog. But yeah, I mean, one of the problems with the company or size, like a great quarter is 15 units and a crap quarter is seven units. I mean, we're dealing with such small numbers, but they're high ticket items. So I'm just curious how many you were actually able to move in the quarter. Yeah.

Yeah, we were able to ship 13 100 MHz units and 18 60s.

And Brandon, I'd like to just point out there because it kind of goes to the heart of what everybody wants to know, and this is a little bit more detail. The 100 MHz thing was production issues, which we have overcome, but in Q2 we hadn't yet. But on the 60 megahertz side, that's where we really fell short because of, you know, I'll say three sales reps quitting in the quarter and then sort of checking out before their last day and sort of we didn't get the really strong finish in 60 megahertz POs that we normally wouldn't in Q2.

Okay, okay. And so while we're dovetailing into the sales issue, so right now you suggested you have 22 direct salespeople. Did I hear that number right, which includes the K-prime salespeople that can sell these units?

That's true. So right now we have a blend of – sales professionals that are employees of our company but we've also added on 22 commission only sales professionals that are under contract and and that was facilitated by k prime's network of of companies that they've worked with in the past so um so so so it's a new it's a new set of um a new set of sales professionals that are knowledgeable in our space already knocking on the doors of customers. The contracts entail a 6% commission. So that's sort of the new part of our sales organization. It's something that K-Prime was sort of pushing to do sooner. And now I wish that I would have pulled the trigger on that sooner. But nevertheless, it's in place now. and it's going to be paying dividends here in Q3.

Okay. Sorry. So let's just clarify that. So you have 22 salespeople that are indirect through K-Prime?

Yes. K-Prime, in the last couple of months since the changes have occurred, have been signing up these commissioned-only sales professionals that they worked with in the past. So in other words, but they're not full employees of our company. They're commissioned only, and their compensation is 6% commission.

Okay. And how many direct salespeople do you guys have under your employ through K-prime and analysis at this point? Right.

So for Canada and the United States, we now have six that are focused in on benchtop NMR. So we lost three and we've since replaced them. And then we're augmenting them with the 22 and changing the way we start and end the sales cycle. So in the past, we would have a sales rep do 75% of the work to close a sale. And a big chunk of that would be highly technical. And then 25% would be support from our technical group. So now that basically that's flipped, we're going to have these 22 sales reps do 25% of the total work, including establishing the qualified lead and then closing on the purchase order. But 75% of it will be done by what I'm going to refer to as our application and product technical specialists. So we're kind of changing. We're adding to the number of sales professionals we have there, and then we're changing the way we close a sale in terms of the sales cycle. I'm happy to... Go ahead, sorry. Go ahead, Brandon.

I'm just trying to think because these guys aren't exactly employees of yours. So you're leaning on K Prime's expertise in this space to basically tell you that a 6% commission is enough for basically a lead gen organization relative to... I thought K-Prime would be more of the sales organization going forward, and I understand they have their hands full with this big contract. But that K-Prime's comfortable that using this external sales force, they'll be incentivized to move product. And I guess Benchtop and MR are somewhat unique to you guys relative to the competition. So I guess they don't really... have competitive products that they could engage that would be competitive with you guys, but generally the idea?

Yes, and they're already knocking on the doors of the same customers that we are. And so they sell complementary products and services, but not competitive products and services.

Okay. And what did you guys say? Did you guys mention something about the NMR backlog was 16 units, 2.6 million? I'm not sure if the backlog is the right number. You guys mentioned something in the prepared remarks? Yeah.

And that was 19 units of 100 megahertz products.

Oh, okay. The 19 units was, okay. And that's the backlog then? Yeah, 2.6 million of 19 units of 100 megahertz backlogs.

Okay, and so you guys said that you expect or you've already sold, and again, you guys said it, so I'm not putting words in your mouth, 18 to 2200 megahertz units in Q3. Is that the target right now?

Yes, that's my estimate of how many 100 megahertz units we will ship against POs in Q3.

Okay, and then you'll have 60s on top of that.

Yes.

Okay, so we should expect a pretty healthy rebound, possibly a record quarter in Q3 in terms of analysis segment revenues. Is that a fair statement, Son, using those numbers? Okay. So just a few more items here to knock off. I mean, it's good because you guys will be getting back on track, and it looks like that's, you know, with fairly good visibility. And you said the airport contract starts ramping up in Q4 and then won't be fully ramped up until Q3 of next year? Yes. Essentially, yes. Okay. Okay. So that's good. So we should be getting incremental revenues on K prime by Q4. And then... Can you just walk me, I mean, I know I always ask you because it's probably, I understand technologically it's attractive, but financially it's just impossible to figure out what's coming through. And it really is bumpy and messes with your numbers. But can you sort of give me the explanation, the excuse of whatever it might be for the RS2D? I mean, when you guys talk about, you know, we missed or whatever, the biggest component of the miss is RS2D. coming in at 300 grand versus a million, you know, one last year. So can you just run me through what, again, what causes that division to go? I mean, I have notes here, but I never quite seem to, to, you know, put together what causes that division to be so volatile in terms of top line.

Yeah. Essentially what it is is that, um, The OEM contract with Quad Systems is via our RS2D subsidiary. But last year, that wasn't the case. So whenever we would be able to book revenue from RS2D to Quad Systems, that was revenue for an analysis scientific. But now, because Quad Systems is... under our control, when the sales occur between RS2D and Quad Systems, we don't get to book that revenue. It's an intercompany transaction. And then when you then say, when I then say the Quad Systems revenue generation to external customers has been delayed, then basically that amount of revenue is also been delayed, as soon as the Quad Systems product is ready for market and the revenue starts to increase there, and it will, then you will see that revenue immediately jump back into our consolidated revenue. But there's a portion of it that has basically disappeared because it's intercompany revenue and we don't get to book it anymore.

So quad systems in RS2D, that's going to show up basically as the same line. You're going to have three segments, analysis, K-prime, and RS2D slash quad, basically.

I'm going to let Randall elaborate on this from an accounting perspective, but I'm going to comment on it from a business person's perspective. So the way I see our business, going forward is there's five, five parts of our business that I think about. So one is, and I'm going to answer your question directly, but it's also going to be in context, Brandon. So one is Benchtop NMR, right? And that's, you know, you can think about as the historical analysis company. The other one is Highfield NMR where we go up market and that's quad systems or it will be quad systems. there'll be a K prime third party sales. There'll be our security business. So that would include the CAFSA project, but other security service revenue. And then you'll have MRI, which will also be driven by RS2D. So in effect, and this is sort of the direct answer to your question. In effect, RS2D is ceasing to be MRI and high-field NMR, and it's going to solely be MRI. And then the high-field NMR part you will see coming through quad systems. So those are the five categories that I view our business as. And then in terms of the segmentation that we're obligated to provide from an accounting perspective and so on and so forth, it's going to take Randall some time to have a one-to-one correlation between those five types of product offerings that I think is important and to how that shows up in our MD&A and so on and so forth.

Okay, that's fine. But if I'm looking at RS2D sales, so you're saying that part of the reason those sales are down 700 grand is because that 700 grand used to be revenues from Quad. But now that you guys, you know, effectively control Quad, those are intercompany right now. Yes, correct. Okay. And that's like 700 grand or is that, I mean, I guess it's tough to say now because it's all intercompany.

You're on the right track. That's ballpark.

Yeah. So I don't really want to penalize you or we shouldn't penalize you too much just because RS2D went down. That's really just a function of what Quad's doing. So basically, if RS2D is down, it's because Quad is having these delays, not because RS2D is doing less business in a vacuum.

That's correct. And just to provide a little bit more color there, so The ways in which we used to do the high-field NMR sales out of our RS2D subsidiary is quite a bit different than the way Quad Systems wants to do sales. Quad Systems is a Swiss company with, you know, former broker employees who are all, you know, Swiss and German and so they're electing to take a different approach with how they go to market and they have some very lofty objectives you know like taking away 20% market share away from broker and so on and I agree with their approach it's different than the approach that we had at RS2D and that I was more directly involved with even in terms of actually making sales myself But it is caused, I'll call it a three-month delay in sort of the revenue spigot being opened on the other end.

Okay, okay. I think that's all I've got for now. Maybe we'll talk offline a bit more about that. some of the details here because they're still alluding me a bit on sort of the sales makeup and what's going on with Quad. But no, that's good. That's a good start. And it sounds like Q3 is going to be a nice bounce. And it sounds like these security revenues are going to start kicking in in the next six months too. So hopefully this is the low point.

You're absolutely right, Brandon. And we think we're going to have a great Q3 and Q4. And I look forward to talking to you anytime. Please give me a call anytime that's convenient for you.

All right. We'll speak to you soon. Thanks.

Thanks, Brandon.

Next question will be from Richard Helm at LJA Magnetics. Please go ahead.

Dr. Kurisky, it's good to hear you in such positive tones.

Well, thank you very much. It's great to hear from you. Unexpected call, but great to speak with you.

Well, the concern is, as an investor, I'm disappointed I didn't get invited to the barbecue tomorrow.

Well, can't you just hop in your private jet and fly out? We'd love to have you.

No, my jet can't go to Canada. Well, not yet, anyway. Hey, tell me something. I missed something early in the conference call. was you said that Quad is under your control. Now, are you 100% at this point or are they 47 or 49 or whatever? Have you acquired the balance of Quad?

No, we have not yet. We own 43% of the company, but our auditors, Ernst & Young, have deemed that we have de facto control because of the seats we hold on their board of directors. And then more importantly, the contract we have in place with them to have a unilateral option to acquire the remaining 57% of the company at a predetermined price. So it's because of that that we have de facto control and that according to IFRS, the auditors have instructed us that we must consolidate their revenue into our revenue. And then the flip side of that is that we are not allowed to include the intercompany revenue that occurs between Quad Systems AG and RS2D.

Number two, the CASA project is, I guess I don't understand, is that more an MRI or an NMR type product?

It's a general scientific instrumentation service contract. So in airports, there's several different types of equipment, including mass spectrometers that when they brush that little piece of cloth on your laptop to determine if there's been explosives-oriented residue on your laptop or on your hands. By the way, they're looking for nitrogen when they do that. So there's an example of a piece of scientific instrumentation that's in an airport. Of course, there's all the imaging systems as well that we've all been through. So our wholly-owned subsidiary, K-Prime, won a $160 million contract to keep all of that equipment up and running. It's quite a lucrative contract by its nature. Number one, that it's a critical service and that it's with... the government of Canada effectively.

That's great. Those 81 airports should be a very... Did you suggest 2 million per month is what the total of those number of airports will generate?

Yes. Once we complete the phase-in period, which we expect to be in Q1 or Q2 next year, then we expect to be in a position to bill them for over 2 million per month. and we expect material revenue from that customer in Q4 of 2022 as well. So the project is on track and ramping, and we're very enthusiastic about that opportunity.

Well, that's great. Great to hear some positive things after your investor, Brandon, sort of ripped you over the coals with some negativisms. Great to hear some positive things coming out.

Thanks very much, Rich. Really appreciate the call, and I look forward to talking to you again soon.

Very good. I hope that happens quickly.

Absolutely.

Thanks, Sean. Take care, Randy. Thank you as well. Good to hear from you.

As a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. And your next question will be from Fred or Investor. Please go ahead.

Thank you. Hi, Sean or whoever. I have two questions. Hi, Fred. One, the quad systems imaging fails that you referenced. Can you tell me what level of resolution you're achieving with those instruments compared to hyperfines units that are sort of an initial commercial distribution?

Yeah, and by the way, those would be through RS2D, not... not quad systems per se. The quad systems is associated with high-field NMR spectroscopy, but we do sell custom MRI systems through our subsidiary called RS2D, and part of those are a common technology platform that is shared with NMR spectroscopy. And so... The biggest difference between what we're doing on the MRI side currently and what Hyperfine is doing is that we're still a high field and we're still using superconducting magnets, which means that our resolution and also sensitivity is more than an order of magnitude better than the Hyperfine equipment, which is at, 0.064 Tesla, which is referred to as ultra-low field. And I guess I'm just going to sort of beg to differ with you in terms of the commerciality of their product. Our CTO is very familiar with theirs. Their product basically has the hope that one day artificial intelligence will be able to pull the mri image out of the raw data but the hardware itself does not produce a useful image because it's at ultra low field so the resolution would amount to basically a blob whereas our resolution would be down to the hertz level and so but if they there is there is There is some promise there in terms of the artificial intelligence aspect of their product concept, but if that ends up working, then it'll work even better at higher fields, which is where we're planning to be.

Excellent. I'm sorry. I thought you had said earlier in the call that those million-dollar imaging systems were medical imaging, so I assumed they were MRIs, but...

All I did was I pointed out that NMR and MRI are very similar regarding the basic math and physics. But no, the systems that we did sell are imaging systems. One is pure MRI, and then the other one is actually different modalities. And, again, I point it out because it was a relatively big contract win. And also to point out that we're active in that area in terms of the, you know, in anticipation of go-to-market strategies. It's not all about science and technology, but there's other aspects of it as well. But the $1.1 million one is, in fact, a pure MRI at high field. I believe three Teslas. Oh, my goodness.

You're much further along in that product area than I had anticipated. But let me move on. That was a great answer. Thank you. Very helpful. Secondly, it appears to me, please correct me if I'm wrong, that the last 12 to 18 months, incoming order rates for your 100 megahertz NMR product have been about three units per month. And that's a bit of a guess on my part. You now say you are either at or close to a production capability of 10 units a month. Does it make any sense for you guys to perhaps close the price gap between your 60 megahertz and your 100 megahertz machines? I believe 100 megahertz is still priced at triple the 60, and it's not selling well. I know you've had some sales disruptions, but by your own admission, those were mostly in the area where 60 megahertz was being sold by the departing salespeople. So the incoming order rate is very small relative to your marketing effort and has been since early last year. In my view, it's not selling well at all. And I think maybe it might be because it's overpriced. I don't know. What's your response to that?

I guess I'm going to respectfully disagree, but I think it's an excellent question that you pose. And so my comments on it would be that, you know, because of our, well, first, if we want to go a little bit back further, we suffered from a lot of product development delays. And then we suffered from manufacturing delays. And so the impact that had on the sales and marketing front was that we've been trying to sort of keep the lid on demand because we've been worried that we wouldn't be able to fulfill orders. But now that we've turned the corner on that, and we basically rebuilt our sales organization and then sort of re-vectored some other aspects of our company that are going to support the sales organization more aggressively, we're going to be able to be more aggressive on the marketing and sales of the 100 megahertz product because we know that we can fulfill orders. So they're hot. Go ahead.

I said that's exactly the answer I wanted to hear. Thank you very much. No, seriously, that's an excellent characterization of what's happened over the last 12 months. That's all I have. I'm going to let other people onto the call. Thank you for your time.

Thanks very much, Fred. It was a pleasure.

Thank you. And at this time, we have no further questions, so I would like to turn the call back to Mr. Krakowski. Please go ahead.

Thanks very much, Operator, and thanks to everybody for for getting on the call. I really appreciate it. You know, one of the favorite parts of my job is talking to shareholders, whether they're new or old. And so I look forward to further opportunities to do that. And I'd like to wish everybody a wonderful rest of your afternoon, or if you're in the East Coast, a wonderful evening. And thank you very much.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.