Nanalysis Scientific Corp.

Good afternoon, ladies and gentlemen, and welcome to the Non-Analysis Q4 and Full Year 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 0 for the operator. This call is being recorded on Thursday, April 24, 2025. I would now like to turn the conference over to Mr. Matthew Salinger from Investor Relations. Thank you. Please go ahead.

Thank you, Operator, and welcome everyone to the Analysis Scientific's fourth quarter and full year 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 31st, 2024. 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 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 encourage everyone to review our public filings and press releases, which are posted on the CDAR filing system at www.cdarplus.ca. So on the call with me today are Analysis founder and CEO, Mr. Sean Krakiewski, and Analysis CFO, Mr. Randall McRae. So with that, I would like to turn the call over to Analysis CFO, Mr. Randall McRae. Randall?

Thanks, Matt. It's a pleasure to join and speak with everyone on the call today. As always, I'm going to dive into the financial results for the fourth quarter, which ended December 31st, 2024. All amounts referenced here are in Canadian dollars. Financial highlights for the three-month end of December 31st, 2024 include, for the three-month end of December 31, 2024, we reported consolidated revenue of $12.3 million, an increase of $2.5 million, or 25% for the comparative period in 2023. Gross margin percentage on product sales rose to 60% versus 48% for the three months ended December 31, 2023. The improvement in gross margin percentage for bench-top NMR is materializing, as our average selling prices have improved and manufacturing cost reductions started in 2023 and continued through 2024 have started to take full effect. Security service gross margin percentage in the quarter was 16% versus negative 20% in the prior 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. The company expects to increase revenue and drive efficiency within this business through 2025. Adjusted EBITDA is used by the company as an approximation for operating cash flows available for reinvestment in the company and servicing financing obligations. Adjusted EBITDA for the three-month end of December 31, 2024 was $1.8 million versus an adjusted EBITDA loss of $677,000 in the same period last year. This improvement was driven primarily by full transition of airports to the company's control, resulting in increased security services revenue, effective cost reduction initiatives and manufacturing efficiency, and slightly improved product sales over the prior year. This was offset partially by a slight decrease in third-party equipment sales. Normalized net loss for the three-month ended was $400,000 for the quarter, as compared to the three-month normalized loss for December 31, 2023 at $2.1 million. Normalized net losses exclude one-time non-cash impairment charges related to the quad investment, loan to quad, contract receivable from quad, and customer relationship assets acquired in the K-prime acquisition. 7.1 million of non-cash impairment charges were recognized in the fourth quarter of 2024. As the quad investment, loan, and K-prime customer relationships have been fully impaired at this point, no further accounting charges are expected related to these items. Now I'd like to turn to the full year. The financial highlights for the 12-month end of December 31, 2024 are the company reported consolidated revenue of $45.5 million, an increase of $17 million or 60% from the comparative period in 2023. This includes $19.4 million in product sales, $21 million of service revenue, and $5.1 million of both-year inventory revenue. Gross margin percentage in product sales for the year was 53%. up from 41% in the prior year. Bench top NMR margins were driven by the reduction of the manufacturing labor force in 2023 and 2024, as well as improved efficiencies in its manufacturing process. The company continues to analyze a variety of methods to manage parts costs and opportunities for increasing manufacturing efficiency, including greater harmonization between the company's research and development and manufacturing labor forces. Service gross margin percentage was 12% for the year ended December 31, 2024, compared to negative 29% in 2023. As before, this margin improvement was the direct result of increases in revenue when the company took over services in all airports in early 2024, as opposed to 2023, where the company was still ramping up services. Adjusted EBITDA after the 12 months ended December 31, 2024, was $2.8 million versus an adjusted EBITDA loss of negative $7.9 million in the same period last year. Normalized net losses for the 12 months ended were negative 6.3 million as compared to the normalized net loss of negative 14 million in 2023. Again, normalized net losses exclude one-time non-cash impairment charges related to the quad investment loan to quad, a contract receivable from quad, K-prime customer relationships acquired in the K-prime acquisition, as well as the loss and loss of control of a subsidiary being quad, which was recognized in 2023. In 2024, these one-time non-cash charges were $7.3 million versus 2023, where they were $2.8 million. Again, as all these assets have now been fully impaired, the company does not expect any further one-time charges related to these items. The company had cash on hand to close the year of $1.4 million, an undrawn available credit facility of $2 million, and working capital of $3.9 million as of December 31, 2024. We're happy to see continued strength in our financial performance over the past year. Top line of margin improvement in benchtop NMR has been a direct result of hard work and focus on both sales and efficiencies in manufacturing. We believe we can sustain our margins and grow sales through new products and innovations, as well as a continued focus on efficiency in manufacturing. As we continue to manage our security services segment, we've been able to demonstrate continuous growth in revenue quarter over quarter. Into 2025, we look to continue to drive revenue growth in the segment, as well as increasing the efficiency of our service delivery to improve gross margins. There's work to be done here, and this is a core focus of ours. The aforementioned efforts have allowed us to record positive adjusted EBITDA from the second quarter of 2024 onwards, and we expect this to continue through 2025. As we look to continue to drive improved gross margins in our security services segment, we do expect adjusted EBITDA to continue to improve as we work towards our goal of overall profitability. While our current results have enabled us to continue to achieve the adjusted EBITDA positivity, we're going to keep our heads down and stay focused. We're continually evaluating efficiencies to further increase annualized cost savings and improve margins in both our segments.

With that, I'll turn the call over to our founder and CEO, Sean Krakuski. Sean? Thanks very much for the financial overview, Randall.

I'm very proud of our 60% year-over-year annual growth and our ability to maintain and grow EBITDA positivity on our path to profitability. The fourth quarter has historically been the strongest sales quarter for the year and was no different this year. We built momentum through 2024 and that culminated in a strong fourth quarter. That momentum is carried into 2025. And while there are some macro headwinds, we feel we have a solid core business in both equipment and services and are positioned for growth over the long term. We see clearly where we can improve and intend to keep the focus that has allowed us to report these results today. Let's go through our business segments. In Benchtop NMR, I'm happy with how this business is performing. We have a strong sales team and the operational changes we've put in place over the last 18 months are bearing fruit, as demonstrated by reported 60% gross margins this last quarter. We continue to see growth in our addressable market with the evolving acknowledgement that NMR is the gold standard in testing. We currently sell into governments, universities, as well as some of the largest enterprises, including pharmaceutical, chemical, electronics all around the world. We intend to keep doing so as well as to expand market penetration both horizontally within these customers as well as vertically in certain markets. We are going to do this by remaining a leader with our product offerings and continue to innovate. A recently launched next-gen 60 MHz is an example of this. This new product has differentiated performance and features and has been designed for industry customers that want the 60 MHz field strength but need more performance and capabilities. This new product is on the same platform as our 100 megahertz product and targets additional customers in the pharma, food, chemical security, advanced materials mining, and academic verticals. On top of this platform, we will launch additional technology innovations, including software applications like our recently released automation software, This new software called the Quantitative NMR Module is an automated, easy-to-use feature to allow users to create and edit methods for routine quantitative NMR assays. This allows technicians to collect data effortlessly with no expertise in NMR spectroscopy required. The module has been designed to work with both our 100 megahertz and our NextGen 60 products. Another example of bench-soft NMR applications that are vertical market specific is the illicit drug analyzer technology. announced in conjunction with a $1.5 million National Research Council grant in April 2024. These types of initiatives will take BenchStop NMR beyond R&D labs and into QAQC manufacturing and into the field for such verticals as law enforcement. We continue to seek strategic partnerships that will take our products deep into specific vertical markets such as pharma. In December, we co-published a study with the United States Pharmacopoeia that concluded that benchtop NMR is efficacious for quality control of active pharmaceutical ingredients. USP agreed to co-market this study to the pharmaceutical industry, and we continue to collaborate with them on initiatives that will bring benchtop NMR into the mainstream of the pharmaceutical industry. In the areas of MRI and medical imaging, We booked multiple medical imaging system sales this past year. This business is and will continue to be somewhat lumpy, but has tremendous growth opportunities. We continue to seek new partnering deals to sell our MRI console as well as to implement large MRI projects. Going forward, we'll continue to develop our medical imaging technology as we stay active with partners and gain scientific credibility in the area of future human applications. Regarding our specific investment in Quad Systems AG and the Highfield NMR market opportunity, as Randall mentioned in his remarks, we recently wrote off the Quad investment as an impairment this last quarter. We currently remain 43% owners of the company, hold two seats on the board of directors. As mentioned on the last call, Quad Systems has been in need of more capital to fund their go-to-market activities. I'm pleased to report that very recently they have raised 1.5 million Swiss francs at a fair price to fund these efforts. In the coming quarters, this recent investment in Quad will drop our percent ownership from 43% to 38%, but we will retain two board seats and remain active with the company despite not providing them with any more financial support. Quad is having some initial success in their go-to-market strategy and expects 2025 to be an exciting year for them. We continue to leverage our software and electronics platform by providing Quad with a high-field NMR console, which is an essential module in their overall NMR system. We continue to develop customer leads as a sales pipeline as part of our distribution agreement with Quad, where we have the right to sell high-field NMR in several territories. Lastly, Quad has made some solid progress on exciting new innovations in the form of potentially game-changing probe technology, and this would benefit sales for both companies. There are tremendous synergies between Quad and analysis, and my original objectives associated with Quad Systems have not changed, despite the aforementioned accounting treatment, as we see a strong future in high-field NMR. Regarding third-party equipment sales, this business has been predominantly reselling for Agilent Scientific Instrumentation Group, but also includes other equipment manufacturers. This has been an incremental, consistent business for us that has historically allowed us to get in front of customers that are also targets for our proprietary NMR products. Since these products from Agilent and others were not our own, we have had much less control and less of an ability to drive growth. Therefore, as previously alluded to, we are going to reduce our efforts selling other companies' products going forward and focus entirely on sales of our own proprietary products and services where margins are higher and we have higher competitive barriers. Turning to our growing services business. The $160 million CASA contract continues to progress both from a billing and margin perspective. As a reminder, we took full control over all 89 airports at the beginning of 2024. While I am happy with the top line revenue and margin improvements year over year, we feel that we are somewhat behind the curve in terms of our gross margin expectations over the last couple of months. We have made leadership changes that we believe will help address this issue. This contract has room to grow both on a billing basis and margin expansion, and we will take what we've learned so far and continue to work to optimize to gain efficiencies and improve margins this year and going forward. The CASA contract is by far the largest source of service revenue that we have, but we do intend to grow this business and leverage the team and knowledge we have built. Also, in terms of focusing on the sale of our proprietary products, there are clear opportunities with our magnetic resonance products in the security industry, and we will look to leverage this channel going forward. With regards to the macro environment and potential headwinds for our business, like many exporters with global supply chains, we have encountered some sentiment of uncertainty with some U.S. customers regarding tariffs. In response, we have taken certain specific measures to mitigate risks associated with export controls and tariffs on key raw materials for our products. Thus far, our mitigation efforts have succeeded, but we will remain vigilant on these matters as the landscape evolves. It should be noted that regarding US tariffs in particular, our products are USMCA compliant and are not currently subject to tariffs. We do expect some downward pressure on product sales, for the first half of 2025. That being said, our sales funnel is robust and we are optimistic that when current economic uncertainties subside, the downward pressure will be relieved. As a reminder, it is worth noting that our service business is currently 99% domestic and not subject to tariffs or export controls. I am confident that we will successfully persevere through these global trade matters as we have a seasoned management team that is fully committed to delivering value to shareholders and all other stakeholders in our company. Now back to the microenvironment and analysis. Since we went public in 2019, we've quintupled revenue and made the company sustainably EBITDA and operating cash flow positive. We spent the last two years executing a strategy of combining growth with generating positive operating cash flow, and we've accomplished that. For the last three quarters, we've achieved positive adjusted EBITDA, generating $1.8 billion in Q4 of 2024. Our strategy now is to carry that positive momentum forward towards sustainable, positive free cash flow, expanding EBITDA margins, and towards our ultimate objective of positive after-tax net income. How are we going to do this? We're going to continue to grow benchtop NMR sales through ongoing technology innovation, including software applications, direct sales, expansion and evolution of our growing dealer ecosystem. We'll continue to keep downward pressure on costs as we continue to distill out inefficiencies brought on by past acquisitions without disrupting important assets. We'll expand our gross margins in our service business by making important changes that are reflective of natural evolution of the business that started generating material relevant only two years ago and is just now positioned for margin expansion. We will continue to incubate and develop our medical imaging and technology group as we stay active with partners and gain scientific credibility with our technology for future human applications. Sell hardware and software to our strategic partner and customer, Quad Systems AG, for the high-field NMR opportunity in applications such as virology research, metabolomics, and proteomics. Our pursuit of operational excellence is ongoing, and while we have accomplished a great deal over the last two years, we feel like we are just getting started. We are enthusiastic about the market potential for our core benchtop NMR products and are confident that our investments in medical imaging and high-field NMR constitute blue-sky opportunities for us in the future. Regarding our service business, we are somewhat behind the curve in terms of gross margins expectations, and over the last couple of months have made required changes to get service profits margins where they need to be. I do want to say that I am enthusiastic about the next five years of profitable growth with a focus on creating value for shareholders. As always, I do want to thank our team here at Analysis as it is through their efforts and commitment that have gotten us here today. And to all the shareholders listening to this call, I thank you for your continued support.

Operator, I would now like to open up the call for questions.

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 are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of from Ventum Capital Markets. Please go ahead.

Hi, Sean. Hi, Randy. Great quarter. I just wanted to ask a question on sort of the margin profile, sort of these third-party equipment verticals. And I know that's sort of becoming less and less a part of the business, but sort of how that's being reflected in EBITDA and and what we can expect in terms of evolution there.

Randall, I'll start off, and if you want to add to what I say, please feel free. So I guess there's sort of two types of third-party equipment sales that are worth consideration. One is, as an example, we sell preclinical MRI systems for a company called Mediso in Europe. And Typical sell there would be we sell something for 500,000 euros and we get a 20% commission. So both that top line number, the top line number hits our revenue and then the commission part is the one that contributes to our EBITDA. But 20% sort of gross margins on something like that. We still have some of that revenue coming in, but that won't be part of our revenue mix in 2026. And then there's sort of like the opposite type with Agilent, which we've talked about extensively, where we don't generate revenue from the complete sale. We only generate revenue from the actual commission amount. And so those amounts are relatively small, but the gross margins are pretty high. So we continue to do business with Agilent. It's something that when I think of 2026, 2027, I kind of view that as not being a material part of our revenue, but it is a good part of our high margin revenue right now, but a very, very small part.

That's great.

And on the same token, you guys have done some really great work in terms of optimizing manufacturing and growing EBITDA margins, um, you know, and CASA is making some nice contributions there as well. Can you just sort of shed some light on what further efficiency initiatives, uh, you plan to conduct, um, you know, moving ahead that, uh, that will create opportunities for additional margin expansion? Like, like how much more, uh, more can you push this?

Yeah. I mean, we, um, We still have a significant way to go there. So on the service revenue side, the focus thus far has really been to just build out the project, to hire the people, to train the people, to get full coverage, to get the customer stamp of approval in terms of the quality that we're providing. But we're out of a point now where we can, like Randall and I always say, we're trying to push those gross margins towards 30%. You know, now whether or not we're going to actually be able to get all the way to 30% sort of remains to be seen. But we can certainly go a lot higher than where we are right now. And, you know, if in a year from now we're not at 25% gross margins on that, I'll be very disappointed. Some of it is going to require some, I would call them structural changes with regards to how we bill. So, for example, the way we make money on that contract is are totally different for the large airports like Pearson and Vancouver and Montreal compared to the smaller airports like Kelowna and so on. And we've learned a lot with the customer as to why they're different. And we're in the process of negotiating changes that are both good for what the customer cares about and good for our gross margins as well. So that's That's just one example. We're also implementing a pretty cool kind of ERP system and fleet management system, includes GPS and those sorts in a control center. And those are going to allow us to increase efficiencies as well. So we don't really talk about that service business as sort of being a technology business, but it certainly is. Maybe not as sort of hardcore deep tech like our magnetic resonance business, But there's a lot of really cool technology innovation going on there as well, including AI, predictive maintenance, and that sort of thing. So we'll drive those gross margins a lot higher than they are now. On the product side of our business, we've got some exciting things planned with new products. on top of our existing technology platform, like ones that now have very low R&D risk, because we've dealt with the R&D risk in the past, so it'll bear fruit. And one in particular that I don't want to talk about too much is going to be right in our gross margin sweet spot, because it's going to have essentially the same COGS as some of our existing products, but it's going to be at... have fundamentally different capabilities. And so we'll be able to charge substantially higher prices and therefore that'll translate into some really great gross margin. So I think, I mean, 60, you know, for a B2B, you know, hardware business, 60% gross margins are fabulous. But our team is fully committed to pushing those even higher. So I'm not going to commit to exactly when that's going to happen, but I'm just answering your question in terms of do I think we can continue to move those? And the answer is yes. So we're still going in the right direction there.

No, that's perfect. And that answers the question. I was looking for some details on just the mechanisms by which you'll be able to push margins higher. And I guess just on the topic of products, maybe give us some further detail on the recent launch of the new Analysis 60 and where you view the TAM on this one. Are you targeting more industrial clientele with this enhanced instrument? Are you looking for more pharma applications? What does the market opportunity more precisely look like in your view?

We've got a product that we've specifically branded as the education product. We call it the TEACH. And that's sort of for really price-sensitive customers, specifically in academia. And that's not the product that we've just described as the next-gen 60. So the next-generation Analysis 60 product is geared, in fact, more towards industrial customers. And then more specifically, we've had a lot of success in R&D labs. Right. But what we really want to do is move our success from R&D labs, whether it's at pharma companies or food companies or chemical companies, into quality control. And then after that, into the manufacturing environment, because that's where the volumes get really, really high. And that's when you start, instead of talking about hundreds of instruments a year, you start talking about thousands of instruments a year. So that next generation product allows us to move more into the quality control part of those vertical markets.

That's great. Thanks so much, Sean. My pleasure.

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 would now hand the call back to Mr. Sean Kukuski for any closing remarks.

Thanks very much, operator, and thanks to all the shareholders that participated on this call, and we look forward to the next opportunity to talk about our business with you. Thanks very much, and have a wonderful day.

Thank you, and this concludes today's call. Thank you for participating. You may all disconnect.