Nanalysis Scientific Corp.

Good afternoon, ladies and gentlemen. Welcome to the Analysis Scientific Q1 2024 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 on Wednesday, May 29, 2024. I would now like to turn the conference over to Matthew Selinger, Investor Relations. Please go ahead.

Thank you, Operator, and welcome, everyone, to Analysis Scientific's first quarter 2024 conference call. Before we begin, I would like to remind everyone that remarks and responses to your questions today will contain forward-looking statements that are based on the current expectations of management. These assumptions involve inherent risks and uncertainties that could cause actual results to differ materially from our responses. Certain material factors and assumptions were considered and applied in making the forward-looking statements. These risk factors are included in our filings for the year ended December 31, 2023. Forward-looking statements on this call may include, but are not limited to, statements and comments with respect to future growth of the company's business, the ability to graduate to a senior exchange, the company's acquisition strategy, the ability to develop future products, and the possible associated results. The company's actual performance and financial results in the future could differ materially from any estimates or projections of future performance implied by the forward-looking statements. The forward-looking statements made on this call speak only as of today, and Analysis Scientific assumes no obligation to update any forward-looking information as a result of new information, future events, or otherwise, except as expressly required by applicable law. So for additional information, I encourage everyone to review our public filings and press releases which are posted on the CDAR filing system at www.cdarplus, which is S-E-D-A-R-P-L-U-S dot C-A. On the call with me today are Analysis Founder and CEO, Mr. Sean Krakiewski, and Analysis CFO, Mr. Randall McRae. So with that, and at the point of the call, I would like to turn the call over to Randall McRae. Randall? Thanks, Matthew. It's a pleasure to join and speak with everyone on the call today. I'm now going to dive into the financial results for the quarter ending on March 31, 2024. All amounts referenced are in Canadian dollars. Financial highlights for the three months ended March 31, 2024 include for the three months ended, the company reported consolidated revenue of $11.2 million, an increase of $6.5 million or 139% from the comparative period in 2023. This includes approximately $4.2 million in product sales and $6.9 million of revenues related to services. $2.2 million of service revenue came from flow-through inventory associated with the company's airport security maintenance contract, in which the company provides purchasing and resale to the customer at cost, with the company billing a fixed charge for the service. This revenue can vary widely quarter over quarter and may be significantly lower in future quarters. Gross margin percentage on product sales was 47% for the three months ended March 31, 2024. Improvement in gross margin percentage for benchtop NMR is materializing, as sales have improved in the second half of last year and continued into the first quarter of this year. In addition, reductions in manufacturing labor late in Q2 2023 have begun to positively affect margins. Security service gross margin percentage in the quarter was 8% versus negative 76% in the prior year comparative period, as the company has completed its full transition of 100% of airport service to its control from the incumbent provider, and now expects to increase revenue and drive efficiency on the projects through 2024. EBITDA loss for the three-month end in March 31, 2024 was $362,000 versus an EBITDA loss of $3.5 million in the same period last year. This improvement was driven by increased product sales, full transition of airports to the company's control, and cost reduction initiatives. Net loss, which includes non-cash items for the three months ended, was $2.5 million as compared to the three-month loss from March 31, 2023 of $4.3 million. The company had approximately $1.7 million cash on hand, an undrawn credit facility of $3.2 million, and working capital of $6.3 million as of March 31, 2024. As noted above, we booked considerable revenues from follow-through parts this quarter related to our security services contract. As we have stated before, these will tend to be lumpy for the life of this contract. This quarter was particularly large. As such, we have now broken out these in a table in the press release. That being said, we are very happy to report that our service business gross margins turned positive this last quarter and was EBITDA positive. We expect these margins to continue to improve as the capital-intensive portion of this project is over, and we'll see reductions in training costs going forward. We feel we're in a good financial position and are poised to now reap benefits of this long-term project. Additionally, we continue to look for opportunities where we can now leverage our trained workforce. Finally, we continue to see the results from our cost reduction plan, which started in the second quarter of 2023. The goal was to better align our resources and reduce our fixed costs. We are seeing these manifest in improved gross margin percentages, which began in the fourth quarter of 2023. The company continues to evaluate other fixed cost reductions to further increase annualized cost savings and has continued to apply cost reduction measures in 2024. I'll reiterate our goals for the year, which are to continue to grow revenue as well as our margins by focusing on positive EBITDA, then profitability for the company as a whole. I'm happy and encouraged by the progress we're making here. So with that, I'd like to now turn the call over to our founder and CEO, Sean Kaczewski. Thank you very much, Randall. To build on what Randall said, I am very happy to report another record revenue quarter of over $11 million in top line results. We're starting to see the makings of a solid scientific instrumentation company with both products based on world-class technology and sticky recurring service revenue. In that context, we're happy to see our services growth margins shift into positive territory with the transition from phase-in to full deployment of the airport security project complete. Having our services business become EBITDA positive is another milestone we are proud to have achieved. In fact, as a company, we had only a small nominal EBITDA loss for the quarter and look forward to shifting this into positive territory. We have all the confidence that we will achieve that goal this year. Regarding our benchtop NMR business, we are very happy about our sales and prospects within this business. We feel this group is on the right track and we are focusing on growth and continued innovation. We have previously discussed that we are applying the advances of our 100 MHz product to our 60 MHz offering. We feel that this will improve our position in the market, providing us with higher performance products at more price points. We hope to release these new products towards the end of this year, yielding revenue growth via direct sales as well as future partnering opportunities. Our steadfast goal and commitment this year is to achieve positive evita in the Benchtop NMR business as well as our other business units. We are working very hard to achieve this objective by cost reductions and revenue growth. To provide more detail on our security services business, as previously announced on January 11th, we took 100% control of all the served airports ahead of the contracted March 31st turnover date. We're happy to report we have exited the phase-in period and are now in control of the basic services and maintenance of all 89 airports in Canada. The phase-in period involved our team hiring and training over 100 technicians and taking over all preventative and corrective maintenance services for passenger screening equipment at 89 airports in Canada from the incumbent service provider. We will now focus on working through the backlog of additional projects and requirements that our customer has for us. With the reduction in ramp-up costs and training, this project began generating positive EBITDA in Q1 2024. We expect our margins to grow as we move to full run rate and will continue to increase EBITDA throughout 2024 and beyond. Additionally, we continue to seek and evaluate other opportunities in our services business with existing and new customers as well as partners in Canada and the United States. Regarding third-party equipment, sales have been steady in the past two quarters and expect them to remain so throughout the year. As mentioned on our last call, we believe the macro-level concerns of headwinds regarding analytical equipment sales have lessened. Therefore, we expect this business to be stable throughout the remainder of 2024. Regarding Quad Systems investment and our high-field NMR product initiative, we currently have two demonstration labs set up and working with full systems, including a superconducting magnet and our console, which we manufacture for Quad. There is one in Strasburg and one in Zurich. There are plans to open more demo labs in locations such as UK, China, USA, and Calgary at our headquarters as we see more customer traction and contingent on available cash flow. In addition to the demonstration lab, there are several paying customers using our high-field NMR products, and we have received positive feedback and testimonials from these customers. While the accounting structure between the two companies has changed, the relationship remains strong. Our team has been integral in developing the high-field NMR system. The two teams will continue to collaborate on an ongoing basis. Our analysis sales team is authorized and trained to sell and service both the high-field system as well as separate modules in several territories. We remain very enthusiastic about the potential of high-field NMR product line, the associated market opportunity, and the relationship with COD. We continue to own 43.5% of that company and hold two seats on their board of directors. In terms of medical imaging sales, we continue to make progress on completing a large customer MRI installation in Europe that includes our proprietary MRI console as well as third-party modules. Regarding new sales, we are encouraged that several large projects are expected to be in the pipeline in the coming quarters, and we will provide more information on those as it becomes available. Overall, in summary, I am very encouraged by our first quarter results, and this is after a strong Q4. In the past, it has been typical for Q1 to be weaker than Q4, but not this time, and I believe this trend will continue. We are starting to demonstrate what our scientific instrumentation products and services company can look like in terms of operating results. I want to emphasize starting. We are not done yet. The changes we put into place are bearing fruit in both of our main businesses, BenchStop NMR and Security Services. Our BenchStop NMR business is doing well. We have good visibility and we expect to continue to have an excellent 2024. Our advanced product offerings and potential collaborations will only bolster what our efforts have been to date. Our airport security services project has moved out of the rollout and will continue to grow into the full runway with improving margins. We will look to optimize our workforce and leverage our trained services team. We look forward in the not-too-distant future to deploying our proprietary capabilities through this channel as well. Our overall financial objective remains to continue to drive down costs while increasing revenues steadily in 2024 and 2025, resulting in a sustainably profitable company. As always, I would like to thank our investors and our incredible employees for their support as we continue to execute on our mission and drive towards our grand vision. Operator, I'd now like to open up the call for questions.

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-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're using a speakerphone before pressing any keys.