Nanalysis Scientific Corp.

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Hello, everyone, and thank you for joining the Analysis 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. If at any time during this call you require immediate assistance, please press star zero for the operator. 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.

Thank you, Operator, and welcome everyone to the Analysis 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 apply in making the forward-looking statements. These risk factors are included in our filings for the year ended December 31st, 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 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 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 more information, I do encourage everyone to review our public filings and press releases, which are posted on the CDAR filing system at www.sedar.com.

on the call with me today are analysis founder and ceo mr sean krakiewski and analysis cfo mr randall mcgray but with that i would like to turn the call over to analysis cfo randall thanks matthew it's a pleasure to join and interact with everyone on the call today i'm 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 revenue 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 was due to warranty costs of $135,000 related to the same customer service issues discussed in the December 31, 2022 financial statements and earnings call. cost due to post-COVID inflationary increases and supply chain issues affecting raw materials pricing, as well as lower utilization of fixed manufacturing 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 corridor were negative 53% as we accelerated the training schedule for the CASA project and 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 CASA project employees. We expect ongoing training costs to manage employee turnover to be far less than the initial training investment required. As we've said previously, we do expect service gross profit margins to improve significantly as the airport security project is 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 for 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 corridor, on May 3, the company closed an upsized $4.1 million private placement. We announced the offering April 21, 2023 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 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, and subject to the execution of definitive credit documents, replace the company's existing senior on-demand secure credit facility with another lenders. 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 CAFSA contract into consideration. Rather, it was our current business without CAFSA. The company expects this new facility will better fit the needs of the analysis today. With these additions and changes, we feel we are building a strong financial base company's future growth. With that, I'd like to now turn the call over to our founder and CEO, Sean Kurkiewski.

Thank you very much, Randall. There's 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 K-Prime. Regarding benchtop NMR, we're continuing to work on integrating K-Prime and analysis sales organizations for the benchtop NMR business, and we believe that the changes made are consistent with the long-term health of the sales organizations. The challenges we faced in 2022, which were many in our benchtop NMRC organization, continue to be 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 augment 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 analysis 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 customers' 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 MHz high-field NMR product in collaboration with Quad Systems at the prestigious ENC conference in Monterey, California. The company expects Quad 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 organizations, and our installation organizations on their go-to-market strategy. 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 remedy recognition in Q1 2023. It is expected that remedy 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 CAPTA 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 CASA 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 CAPTA 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 nature to them and only be meant to conserve cash in light of potential lowering short-term growth numbers. In closing, I'm very proud of what we're 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'll 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 analysis 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 CAATSA 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 Highfield and Benchtop NMR. continue to make steady progress on our MRI strategy, and position ourselves for an uplist 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.

Thank you. Ladies and gentlemen, we will now conduct the question and answer session.

If you have a question, please press star followed by the number 1 on your touchtone phone. You will hear a one-tone prompt acknowledging your request. If you would like to cancel your request, please press star 2. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. Once again, it is star 1 to ask a question. Your first question comes from the line of Stephan Quenneville from Echelon Capital Markets. Your line is now open.

Hi, guys. Thanks for taking the question. I guess the first thing, I appreciate the color on all the things that are going on at different business lines, but can 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? You know, how much was due to you guys maybe taking your eye off the ball and focusing on CAATSA? How much is tied to just general economic challenges? And in what sectors and 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... You know, 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.

Thanks very much, Stefan. This is Sean. So, you know, 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, you know, the sales cycles seem to be dragging out a little bit longer than what we're used to. So, you know, we attribute that to some macro economic conditions. And yeah, unfortunately, we're 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. You know, we had a terrible Q2 in 2022 and then we bounced back fairly well with strong Q3 and Q4 numbers. But what we're 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, um, the Catholic contract has, um, you know, taken a lot, a lot of our resources and, and, um, and it has affected other parts of our business. There's no question about it. Um, you know, um, you know, when I, when I signed the Catholic contract, um, you know, I knew it was taking risk and, and, um, um, but I think the worst risk is worth it. And, um, For anybody that's interested in the long-term prospects of our company,

This is Randy McRae, the CFO.

Did we lose Sean, operator?

Yes, he got disconnected from the call.

Okay, let me jump in here. And what I'll say is with regards to long-term prospects, Stefan, we're still seeing good lead generation now that we've established or re-established 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're 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 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?

Well, I mean, yeah, it's very general. I mean, you know, it's a pretty big miss in the quarter. And, you know, the base NMR business is, you know, one where we were expecting, you know, reasonable growth in the year. I mean, for it to contract is surprising. I mean, do you expect the business, you know, Obviously, it's not going to grow. It doesn't sound like it's going to grow fantastically, but do you expect meaningful rebounds in the next couple quarters, or do you expect a soft Q2, Q3? Maybe give me a little more of your best estimate on how things are looking for the next couple quarters.

I think with what I'm seeing in the pipeline – That gives me, you know, optimism, but I would say given the lengthening of our sales cycle that we're starting to feel, I would suggest it's probably going to be more backloaded into the second half of the year. That's where I see things right now. Which is part of why, you know, we're taking 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.

Okay, great. And then on the RS2D project, it sounds to me like there's a, I mean, you know, another part of the myth 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, you know, kind of,

revenue that's going to show up next quarter or in the third quarter that sort of didn't show up this quarter or just help me understand uh yeah i mean it's about a million it's about a million and we expect to be completed the project within the calendar year so in terms of the the exact breakdown of that um you know that that really depends on the you know 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 of you know what what i'm comfortable saying is the aggregate amount and our expectation that project will be delivered and complete within 2024 2023 excuse me okay um

And then just finally on the cats to roll out, you know, again, this is the, you know, the thing that's sort of making the difference here. You're, you have a presence in 44 airports. How do you, you know, from here to sort of the end of September, how is that ramping? You know, is it a kind of a linear every couple of weeks, we're going to see more airports coming on or is it, Maybe describe 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's that looking?

No, I would say it's an interesting question. It's an accelerating ramp. So the kind of metric that I like to point out is at the end of December 31, 2022, we had a presence in nine airports. and by the kind of the release date for our q1s we were 39 and then here today we're at 44. so it's an accelerating pace of uh of airport entry which is not shocking you know 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've seen the substantially one-time cost of a million dollars in training and training-related expenses in the corridor. 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 it'll be a little more status quo through that time frame. And then we'll finish off that last bit towards the end of Q3.

Okay, well, that's it from me for now. I'll jump back in the queue. Great. Thanks, Stefan. Once again, if you have a question, please press star 1 on your telephone keypad.

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.

Oh, yeah, no, thanks. I didn't want to hog the call, but I don't want to ask 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, you know, accelerate growth in that business. And I can imagine, again, you know, with your focus on CAATSA, maybe some of those opportunities or projects or partnerships may have been sort of, I'm certainly sure not put on the back burner, but maybe just hadn't gotten the right focus. Where are you on that front? And, you know, yeah, how's that looking or that sort of type of strategic opportunity pipeline? How's that looking?

It's looking positive. There's always some in the queue that we're in discussions on and working with people on. And what we try to do is work with partners who have specific vertical expertise and an established reputation and customer base. So they've got a 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 the industry adoption of particular pieces of equipment. So not only are we working in verticals, we're working with an eye towards that standardization and having our instruments become part of that, having Benchop NMR become part of that standardized adoption. So we're always working on things. We're working on some as we speak, and we're 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 testing methodology of choice historically.

Great. That's it for me.

So maybe to be a little less generic to step on, you know, 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.

Oh, so you think that there might be some announcements sort of in this calendar year?

Like I said, 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.

Great. That's it for me. Thanks.

There are no further questions at this time. I will now hand over to Mr. Sean Terkiewski. Please continue.

Thank you very much. I apologize to everyone. I'm 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'm with probably 95, 99% of those particular investors at a two-day event and we'll 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'll talk to you soon. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.