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spk00: Thank you. Thank you.
spk01: Good afternoon, ladies and gentlemen, and welcome to the Analysis Scientific Q2 2024 conference call. At this time, all lines are in 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, August 28, 2024. I would now like to turn the conference over to Mr. Matthew Selinger, Investor Relations. Please go ahead.
spk05: Thank you, Operator, and welcome everyone to the Analysis Scientific's second quarter 2024 conference call. Before we begin, I would like to remind everyone that our remarks and responses to your questions today will contain forward-looking statements that are based on the current expectations of management. These assumptions involve inherent risks and uncertainties, that could cause actual results to differ materially from our responses. Certain material factors and assumptions were considered and applied in the making of the forward-looking statements. These risk factors are included in our filings for the year ended December 31st, 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 such forward-looking information as a result of new information, future events, or otherwise, except as expressly required by applicable law. For additional information, I do encourage everyone to review our public filings and press releases, which are posted on the CDAR filing system, which is at www.cdarplus.ca. So on the call with me today are Analysis founder and CEO, Mr. Sean Krakuski, and Analysis CFO, Mr. Randall McRae. So at this point in the call, I would like to turn it over to Analysis CFO, Randall McRae. Randall?
spk03: Thanks, Matthew. It's a pleasure to join and speak with everyone on the call today. I'll now dive into the financial results for the quarter ended June 30th, 2024. All amounts herein are referenced in Canadian dollars. Financial highlights for the three months ended June 30th, 2024. The company reported consolidated revenue of $11.5 million, an increase of $4.5 million or 65% from the comparative period in 2023. Gross margin percentage on product sales was 50% for the three-month end of June 30, 2024. Improvement in gross margin percentage for benchtop NMR is materializing. Sales have improved in the first half of this year, and manufacturing cost reductions started in 2023 have begun to positively affect margins. Security service gross margin percentage in the quarter was 10% versus negative 36% in the prior year comparative period. as the company completed the full transition of 100% of airport service to its control from the incumbent provider in the first quarter of 2024, and now expects to increase revenue and drive efficiency within this business through 2024, while keeping costs stable. Adjusted EBITDA for the three months ended June 30, 2024 was $414,000, versus an adjusted EBITDA loss of $2.4 million in the same period last year. This improvement was driven by increased product sales, full transition of airports to the company's control, resulting in increased security services revenue, and the effect of cost reduction initiatives. Net loss, which includes a number of non-cash items, was $2 million for the three months ended, as compared to the three-month loss for June 30, 2023, of $4.1 million. The company had approximately $1.1 million cash on hand, an undrawn credit facility of $3.2 million, and working capital of $5.2 million as of June 30, 2024. We're very happy to have achieved multiple financial milestones this quarter. First, we're very encouraged to have had another record revenue quarter. Second, and more importantly, we were able to achieve EBITDA positivity for the company as a whole. As many of you know, this has been a stated goal of ours for some time, and we are very encouraged to have achieved this. This is a direct result of higher revenues in both our operating segments, as well as our cost reduction plan, which started in the prior year and continued into this year with the goal of better aligning our resources and reducing our fixed costs. That being said, our work isn't done. We continue to evaluate other fixed cost reductions to further increase annualized cost savings, and we'll continue to apply cost reduction measures through 2024. Additionally, we believe there's leverage in areas like security services where we can optimize staffing and utilization for margin expansion which we did see some improvement in this quarter. While we are overall very encouraged, we will not take our eye off the ball to continue to drive revenues and margins upward as we go forward. And with that, I'll pass it over to our CEO, Sean Krakuse.
spk06: Thanks very much for the financial overview, Randall. I too am proud of what we are accomplishing here, and I echo the sentiment that we must remain steadfast with cost reductions as we drive revenue growth. I am indeed pleased that we accomplished another record revenue quarter of $11.5 million. Additionally, and just as importantly, we achieved positive EBITDA company-wide, another important milestone and previously stated goal for our company. We are growing both our magnetic resonance product business as well as our services business with very sticking recurring revenue. And it is my vision to make these two businesses work synergistically as we build a world-class scientific instrumentation company. With over half of the year behind us, I am very pleased with these results and I'm even more enthusiastic about the momentum we have going into the back half of the year, which historically has been stronger than the first half. In our benchtop NMR business, we continue to see sales and our sales pipeline strengthen. We have met our sales targets for four quarters in a row, and we expect this to continue for the rest of the year and beyond. We achieve solid growth year over year, and we will have an excellent second half of 2024. We continue to innovate in this business with some exciting product announcements anticipated before the end of this year. Our 100 MHz instrument is the top of its class in benchtop NMR, and we're applying all those advancements to our 60 MHz product, which will allow us to dominate in the sweet spot of the market opportunity. While originally this technology was predominantly hardware-centric, as we continue to build out our installed base, we are now equally focused on software innovation, including AI techniques for specific applications such as illicit drug detection and QAQC of medicines, as evidenced by our press release in April of this year regarding a $1.5 million award from the National Research Council. We have built up a catalog of over 50 application notes and over 100 co-authored, peer-reviewed scientific papers with collaborators all over the world. In the future, we will talk more about these publications and collaborations, including progress in generating regulatory tailwinds for our benchtop NMR products. Not only will we launch products at different price points, but we are also evolving towards providing smart solutions associated with these products to customers in vertical markets. We will sell these solutions via expanding direct sales organization, and we will also establish partnerships with value-added resellers that have deep channels into these vertical markets. In the area of MRI and medical imaging, as Randall mentioned, we had a solid quarter bolstered by a sizable sale to a customer in Geneva, and we expect this pattern to continue in the second half of the year. In particular, our proprietary MRI console has attracted significant interest from partners that are thought leaders in next-generation MRI technology and products. I always like to emphasize that from a fundamental math and physics perspective, the technology associated with MRI is the same as with NMR, and our technology platform is shared and leveraged across our different magnetic resonance product families of Benchtop NMR, MRI, and Highfield NMR, where we have an ongoing partnership and investment in Quad Systems AG of Switzerland. We've made tremendous progress on our proprietary MRI console over the last two years and are now shifting into a new level of partnership exploration, which I believe will bear fruit for our company for years to come as we steadily move towards the vision of one day having a clinical MRI product. Regarding the specific investment in Quad Systems AG at Highfield NMR, in 2023, we announced that after years of joint R&D with Quad, that the company would begin to rely less on analysis on a day-to-day basis. Today, Quad Systems has a commercially viable product and is building its sales pipeline. We are proud of the role we've played in incubating Quad Systems, and we believe strongly in the market opportunity for their product. We remain 43% owners of the company, hold two seats on the board of directors, and we continue to provide them with our proprietary console and software as part of their overall high-field NMR offering. We also have a distribution agreement with Quad, giving us the right to sell high-field NMR in several territories. There are tremendous synergies that exist between Quad and Analysis. My original objectives associated with Quad systems have not changed, and we are exploring new ways to achieve those objectives. Regarding third-party equipment, which is predominantly the reselling for Agilent's scientific instrumentation group, we've seen steadiness in this area. We expect that to continue to be the case for the remainder of 2024. We may revisit these kinds of reseller agreements in the future as our proprietary products require more and more attention from our own marketing and sales organizations. In the meantime, we look forward to continued steadiness from this and other such relationships as they constitute not only incremental revenue, but also opportunities to knock on the doors of more and more customers in our space. Shifting gears now to our growing services business, we continue to grow revenue and margins on the $160 million CAFSA contract, as Randall alluded to. Since taking full control of 100% of the Canadian airports at the beginning of the year, we have been in charge of the basic service and maintenance in all 89 airports, with a team of over 100 trained and credentialed field technicians performing preventative and corrective maintenance for all passenger imaging and screening equipment. It was a very busy summer travel season, which resulted in increased work orders. With the basic services to the customer being fully established in February, we then started to tackle the backlog of extra projects that the customer specified for us, constituting significant revenue growth with little extra costs. We have been adapting well to the ebbs and flows of this business, and we're confident in achieving sustained growth. There is plenty of work to be done with our existing workforce, and we continue to optimize workflows and utilization rates. As we become more and more entrenched with the customer, the backlog of extra projects continues to grow, which we expect to yield expansion of gross margins and bottom line profitability. While the CASA contract remains our largest source of services revenue, it is not our only source, and our objective is to grow this overall service business, eventually making it fully synergistic with our magnetic resonance product business. Overall, in summary, with two quarters behind us and nearly two-thirds of the year complete, I remain very encouraged by our results to date and am optimistic about the remainder of the year. We had a strong Q1 and a stronger Q2 with record revenue in the quarter and positive EBITDA. From a year-over-year perspective, we've made tremendous progress. We are experiencing solid growth and continue to successfully shed costs without negatively affecting trajectories. We've also succeeded at ramping up our large service contract and transitioning it from a major source of cash burn to a source of gross profit. Even though we've made tremendous progress, we feel like we're just getting started. Our core DNA is that of a quintessential technology innovator, and we have also evolved into a solid operational company with a strategy of combining high margin proprietary products with sticky recurring revenue in the area of imaging and detection equipment. We're pleased with our revenue trajectory and will continue to expand margins. As we progress, we remain as eager as ever to learn and thus optimize as we serve our customers and launch new products. Innovation and a commitment to operational excellence will fuel our business going forward. We have not taken our focus off the goal to continue to drive down costs while increasing revenue steadily in 2024 and 2025, ultimately producing a profitable and sustainable company. As always, I want to thank our incredible employees for their tremendous efforts and our shareholders for their continued support. Operator, I would now like to open up the call for questions.
spk01: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a prompt that your hand has been raised. And should you wish to cancel your request, please press star followed by the two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Stefan Quinville from Ventum Financial. Please go ahead.
spk04: Hey, guys. Thanks for taking my question, and congrats on the great quarter. I guess my first question is on sort of the persistence of just being EBITDA positive over the next couple quarters. Again, this is ahead of our expectations with the quarter you had. But it seems like with the medical MRI sort of, I would say, surprised upside revenue there. as well as the seasonality in the benchtop business. As we know, Q3 tends to be a bit softer because of academic markets. So no one's in summer time is a bit slow there. Do you expect like, you know, Q3 and Q4 to also be even that positive?
spk03: So I'll, let me jump in for Stefan. It's Randy here. And then I'll, I'll pass it over to Sean to talk a little bit about kind of the Q3 outlook. But yeah, Yeah, you raise a good point. We did have a medical imaging sale here in the corridor, although those tend to be a bit lighter on margin for us. So the contribution to EBITDA is quite a bit smaller than some of the other businesses. And the two big components, though, Benchtop NMR and our security services business, the numbers we're seeing in Benchtop NMR are good, but they're not numbers that are so out of the realm of what we've done in the past. So I absolutely think we can continue to maintain momentum in Benchtop. And then for security services, we're seeing strong activity, but it's regular activity. So our goal with that business, as we said earlier in the call, is to continue to grow that top line and continue to manage efficiency as well. So Yeah, I think we're on a good trajectory right now. Sean, if you want to chat a little bit about the Q3 outlook, I'll pass that over to you.
spk06: Thanks, and thanks, Stefan, for the question. I'll echo Randall's comments and just say, you know, we've got – we've set ourselves up such that we have many ways to win. You know, revenue growth, margin expanse, and our costs in Q3 and Q4 will be substantially – lower than our costs were in Q1 and Q2. And I feel great about Q3. I don't feel like, I mean, yeah, the medical imaging sales, there is sort of a lumpiness to them, that's true. But I see no reason why we're not going to see those same things in Q3 and Q4 as we have in the past. Our proprietary MRI products are coming on strong with some Very interesting partnering activities occurring. So without sort of giving quantitative kind of guidance or anything, I feel extremely confident that the second half of the year is going to be better than the first half of the year on all fronts.
spk03: I'm sorry. Thanks, Sean. So, Stefan, do you mind if I... Sorry, go ahead. Oh, no, go ahead. Better you talk to me. I was going to say, just to add a little bit of clarity to my comments, I wanted to give you a bit of insight on to the kind of some of the components of revenue here in the quarter. But all in all, I think the key here is, yeah, I do believe we've crossed the threshold and we'll continue to generate positive EBITDA going forward. You know... And remember...
spk06: I just also want to add to that, Steph. I'm sorry to cut you off. And remember, our objectives aren't just to be EBITDA positive. Our objectives, and by that I mean, we've been meticulously executing on a plan not only to get EBITDA positive, but also outright cash flow positive and bottom line after tax net income positive. So So that plan is continuing going forward.
spk04: Well, it's funny, you sort of got to my next question, which was to get to that sort of true cash flow positive and net income positive, what level of revenue are you looking for broadly on a quarterly basis where you feel that that's achievable?
spk03: So, you know, I would definitely encourage everybody to take a look at our cash flow statement. You know, one of the things that I'm really, really happy about for the six months, for six months of the years, we've generated a strong, positive operating cash flow. And, you know, our positive EBIT does one reflection of that, but I'm quite happy about where operating cash flow is at. If you look at then the amount we spend on capitalized R&D and the amount we spend on capital assets, it's relatively light. So for us to get there, you know, we're talking, you know, to cover those costs in the mid six figures. And then, you know, after that, we obviously have to deal with, you know, continued repayments on our bank loan. But, you know, we're looking at, you know, several million more to start getting to that stage of positive cash flows of top line revenue. And of course, it depends on the revenue mix, right? Our Our security service business is heavily fixed cost oriented. So a dollar of revenue in that business has an outsized impact compared to product sales. But we're working on growing both of those and getting ourselves to positive cash flow. And then secondarily, as we said on the earlier part of the call, we're not done with efficiency and cost management. That is a key part of continuing to execute and getting ourselves to positivity. So, you know, my laser focus right now is getting us to positive cash flow, and I think that's going to result in positive net income shortly thereafter.
spk04: Great. And I just wanted to circle back onto the benchtop business. You know, obviously that's been lumpy the last little while, you know, excellent quarter uh you said the pipeline is looking good can you just give me a bit better sense of the overall uh backdrop and you know obviously it looks like you're executing it you know sort of better than we we'd expected on that um and you sound very uh pulled up about product launches in the back half of the year um around the 60 megahertz Can you just maybe dive a little bit deeper into what you're seeing there and what we can maybe expect over the next, you know, the back half of the year, maybe into 2025 as well?
spk06: Yeah, absolutely. So this is Sean. We, you know, we've been working very hard on the fundamentals, you know, after we had those, you know, well-documented operational hiccups, you know, over a year ago, I guess 18 months ago or so. We've just been focused in on lead generation and expanding our direct sales organization and expanding our different types of distributor networks and just like, you know, really like digital marketing and all that sort of stuff. We've really been focused in on that. And that's what's caused our sales pipeline to strengthen. And that's why I'm so confident that The second half of the year is going to be a lot stronger than the first half of the year, even though the first half of the year was decent. And so those sorts of fundamentals that are going to carry strength into the rest of this year and into 2025. And then sort of beyond that, you know, where we're expecting to see continued, you know, exciting growth from there is through value-added partnerships. And we've talked about this quite a bit in the past, but we continue to have great discussions with companies that can take our products deep into vertical markets like food and so on. And regulatory tailwinds are part of that as well. We've had United States Pharmacopoeia Methods approved by that governing body, which is closely related to the FDA in the United States, mostly for pharmaceutical processes like quality control of excipients. Excipient is a substance that's in a type of substance. There's different kinds, a type of substance that's in every medicine that deals with the delivering the active ingredient, um, into the body. So, so it's a very important part of pharmaceuticals and medicines and, and we've been successful at working with the United States Pharmacopoeia to drive requirements for benchtop NMR. And that's going to be another thing that, um, um, that drives, um, growth going forward. So like in, you know, into the, beyond the previous timeframes that I've, that I've mentioned. So really excited about that. Um, And there was another part of your question about product announcements later this year. So right now, we're really great at the high end of Benchtop NMR with our 100 megahertz. It's the top of its class, and it's very expensive as well. And then we're very successful sort of at the lower end. I'll refer to that as maybe the academic part of the market with a really great, user-friendly, reliable product that's good for price-sensitive customers. And our product announcement before the end of this year will have to do with how we're going after the middle of that market. So industrial customers who are performance-sensitive, but the volumes that they purchase at are such that They need price points that are lower than our 100 megahertz product currently is at. And I think that's the sweet spot of the market going forward. The low end and the high end will always be there. But, you know, that mid range is really what's going to drive volumes going forward. So we're really excited about the product announcements that we have coming up here. We've just had some tremendous R&D successes over the last six months or so.
spk04: And I assume that's also going to drive, you know, that announcement's going to be driving potential vertical partnerships, right? Because you've finally kind of cracked the code on the performance and COPS to drive it out. That's exactly what you're saying. That is exactly right. Absolutely. Okay. And just one final question for me. Just on maybe a target gross margin in the services business, Do you have something you're looking to get to on the... You guys did a great job this quarter on the business, but is there a number you want to get to your targeting in terms of gross margin?
spk03: Yeah, there is. We've talked in the past about 25 plus percent EBITDA margins on that business. And Frankly, we're not done working on it. We're not done growing it and working on our efficiency until we're getting into margins of that type.
spk06: And I think Stefan was asking about the gross margins. So I think Randall would say that, you know, we're targeting like 30% plus in terms of the gross margins.
spk03: Yeah. They're fairly close to each other just the way the costs are laid out.
spk04: Yeah. That's it for me. Congrats on the quarter, guys. Great job. Thanks very much, Vivaan.
spk01: Thank you. Once again, should you have a question, please press star, followed by the one on your telephone keypad. There are no further questions at this time. I want to hand the call back to the Analysis CEO, Mr. Sean Krakowski, please go ahead.
spk06: Thanks, operator, and thanks very much to all the shareholders that participated in this call. We really appreciate your time. For those of you that are in Calgary or nearby, Um, uh, we have a shareholder barbecue tomorrow, which we do typically once a year. So everybody's welcome to that. Um, some of our employees cook up some of their favorite dishes and it's just a fantastic time here. So I hope to see you there. And then also, um, tomorrow morning, we're, we're doing this, um, for, for European investors, uh, as well. And we look forward to that. And as always, I look forward to, um, to any opportunities to speak with investors, buy them dinner and so on. I'll be at probably LD Micro in LA, and then I'll introduce some future, and then the CEM event in Muskoka in September. So if there's any opportunity for me to buy you dinner or sit down for a cup of coffee, please let me know, and I'd love to do that.
spk01: Thank you, and this concludes today's call. Thank you for participating. You may all disconnect.
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