© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen, and welcome to the Nanalysis Scientific Corp. Full Year 2023 Conference Call. [Operator Instructions] This call is being recorded on Monday, April 29, 2024.
I would now like to turn the conference over to Matthew Selinger. Please go ahead.
Thank you, operator, and welcome, everyone, to Nanalysis Scientific's Fourth Quarter and Full Year 2023 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 making the forward-looking statements. These 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 Nanalysis 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.
For additional information, I encourage everyone to review our public filings and press releases, which are posted on the SEDAR filing system at www.sedarplus.ca.
So on the call with me today are Nanalysis Founder and CEO, Mr. Sean Krakiwsky, and Nanalysis CFO, Mr. Randall McRae. So at this point of the call, I would like to turn the call over to Nanalysis CFO, Randall McRae. Randall?
Thank you, Matthew. It's a pleasure to join and speak with everyone on the call today. I'll first dive into the financial results for the quarter ending on December 31, 2023, and then go into full year results. All amounts referenced are in Canadian dollars.
Financial highlights for the 3 months ended December 31, 2023, are for the 3 months ended December 31, 2023, the company recorded consolidated revenue of $9.8 million, an increase of $2.6 million or 36% from the comparative period in 2022. This includes $5.5 million in product sales and $4.4 million of service revenue related to security services.
Gross margin percentage on product sales was 48% for the 3 months ended December 31, 2023. Improvement in gross margin percentage for Benchtop NMR is materializing the sales have improved in the second half of the year. And reductions in the manufacturing labor force in late Q2 have begun to positively affect margins.
Service gross margin percentage in the quarter was 21% as the company accelerated its training schedule for the Airport Security Project and began expensing wages related to the airports that were in service. Management expects service gross margin percentage to improve significantly as the Airport Security Project is phased into full capacity and revenue scale-up continues in 2024. EBITDA loss for the 3 months ended December 31, 2023, was $774,000 versus a $2.5 million EBITDA loss in the same period last year. Net loss for the 3 months ended was $2.1 million as compared to the 3-month loss for December 31, 2022, of $3.3 million. For the full year ending on December 31, 2023, the company reported consolidated revenue of $28 million, an increase of $3.6 million or 15% from the comparative period in 2022. This includes $16.3 million in product sales and $12.1 million of service revenue.
Gross margin percentage on product sales was 41% for the 12 months ended December 31, 2023, down from 49% in the prior year. Benchtop NMR margins were depressed in the year due to a slow scientific instrumentation market in the first half of the year as well as higher costs related to post-COVID supply chain issues and ongoing inflation.
Starting in the second and into the third quarter, the company began cost-cutting measures, including the reduction of its manufacturing labor force to better align with its current manufacturing requirements. Because of these cost-cutting measures as well as improved sales markets, gross margin percentage on product sales rose to 48% in the fourth quarter. The company continues to analyze its supply chain to manage its material costs.
Services gross margin percentage was negative 23% for the 12 months ended December 31, 2023. This was the result of high upfront training costs related to the rollout of the Airport Security Project as the company's labor force was hired and trained through 2023. EBITDA loss for the 12 months ended December 31, 2023, was $8.1 million versus an EBITDA loss of $4 million in the same period last year.
Net loss for the 12 months ended was $16.8 million as compared to the loss for December 31, 2022, of $9.9 million. This increase was driven by losses generated from upfront training related to the airport security contract of $2.9 million and a loss on derecognition of QUAD of $2.8 million, offset by a $1.1 million increase in gains on contingent consideration.
The company had cash on hand of $759,000, an undrawn available credit facility of $2.1 million and working capital of $3.3 million as at December 31, 2023.
Finally, during the year, the company continued its cost reduction plan, including layoffs in some of its segments, which started in the second quarter to better align its resources and reduce its fixed cost. This began manifesting itself in improved gross margin percentages, particularly in the fourth quarter, as I noted above. The company continues to explore other fixed cost reductions to further increase annualized cost savings and has continued to apply cost reduction measures in 2024.
With the bulk of the capital-intensive portion of the Airport Security Project behind us, we feel we're in a good financial position and are poised now to reap the benefits of this long-term project. As we have noted before, while there will be ongoing training costs related to the airport security project, we are expected to be much less than in the initial phase.
Our goals for this year are to continue to grow revenue as well as our margins, focusing on positive EBITDA and then profitability.
So with that, I would now like to turn the call over to our Founder and CEO, Sean Krakiwsky. Sean?
Thanks very much, Randall. We're happy to have exited 2023 with momentum and feel strongly that we will carry that through 2024 from everything we are seeing. 2023 was not without its challenges, and we feel that the changes we've put in place in terms of rationalizing the business and leadership are bearing fruit.
We closed 2023 with a record quarter of $9.8 million in revenue. This was a result of continued ramp-up of our large Security Services contract but also strong sales returning to our Benchtop NMR segment. What is significant to note here is that while we had similar numbers in the past in terms of revenues in this segment, those were largely a result of turning to backlog. This is organic growth as a result of our rebuilt sales team hitting its stride.
As many of you may remember, we had turnover in our sales staff early in the year. We feel that we are fully recovered employees to continue to grow under the newly appointed leadership of Nick MacKenzie as VP of Sales that we announced on our last call. Nick reports directly to me, is not connected to our Security Services business at all, and we will continue to work closely together going forward.
Regarding our Security Services business. On our $160 million contract that Randall alluded to, we have concluded the phase-in period and are now in control of the basic service and maintenance of equipment in all 81 airports in Canada. The phase-in period entailed the hiring and training of over 100 field technicians and taking over all preventative and corrective maintenance service for imaging and detection equipment 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. We will do this with the same workforce. And therefore, we're in a part of the contract, whereby the costs, mainly training, level off, and revenue is expected to continue to increase through 2020 towards full revenue run rate.
As we press released in January, we expect this project to begin generating positive EBITDA in Q1 2024 and expect EBITDA margins to expand throughout the year and beyond. Additionally, under the leadership of Sime Buric, I expect us to expand the capabilities and opportunities for our Security Services business, customers and partners in Canada and the United States.
Regarding our Benchtop NMR business. As we have mentioned on previous calls, we continue to innovate our products. The current focus has been on to apply the advances made on 100 megahertz product to our 60 megahertz offering. We feel that this will improve our position in the market because we'll have higher performance products at more price points.
Because of the tremendous progress that was made on the 100 megahertz last year, we have been able to reduce the size of our R&D group while maintaining a culture of innovation. This aligns with the goal and commitment to achieve positive EBITDA in the Benchtop NMR business as well as all of our business units. We are working very hard to achieve this objective via cost reductions and increased revenue.
Regarding our third-party equipment sales, which is mostly the reselling of Agilent Scientific equipment under the leadership of Nick MacKenzie. We had a steady fourth quarter last year, and we see that steadiness continue on into this year. What we had previously spoke of some macro level concern regarding analytical and scientific equipment sales, we believe the headwinds have lessened to a significant degree. Therefore, we expect this business to be stable throughout the rest of the year.
Regarding QUAD systems and the High Field NMR product. QUAD currently has 2 demonstration labs set up and working well with full systems, including superconducting magnets and our console, which we manufacture for them. There is one demo site in Strasbourg and then one in Zurich. There are plans to open more demo labs in locations such as the U.K., China, United States, and Calgary at our headquarters as we see more customer traction and this is also contingent on available cash flow.
While the accounting structure between the 2 companies has changed, the relationship remains strong. Our team has been integral in developing the High Field NMR product for QUAD. The 2 teams will continue to collaborate on an ongoing basis.
Our Nanalysis sales team is authorized and trained to sell and service both the full 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 QUAD. We continue to own 43.5% of that company and pulled 2 seats on their Board of Directors.
In terms of our MRI sales group. We continue to make progress on completing a large custom MRI installation that includes our proprietary console as well as third-party modules, and we also continue to sell our MRI console and its software independently on a stand-alone basis.
Overall, in summary, I'm encouraged by our progress over the last year. Changes we put into place are bearing fruit in both of our main businesses: Benchtop NMR and Security Services. The Airport Security Project was a big undertaking and not without a learning curve. We are well past the heavy lifting here and now need to work on growing the project and optimizing the workforce. As we have stated, this project is going to give us a large service component that we can leverage today and in the future when our proprietary hardware products are deployed more widely.
Our Benchtop NMR business is doing well, and we expect to have excellent 2024. Our overall financial objective is to continue to drive costs down whilst increasing revenue steadily in 2024 and 2025, resulting in a sustainably profitable company.
As always, I would like to thank our investors and our employees for their support as we continue to execute on our mission and drive towards our grand vision.
Operator, I would now like to open up the call for questions.
[Operator Instructions] Your first question comes from the line of Stefan Quenneville from Echelon Capital Markets.
Congrats on the quarter. Would you guys mind the -- [ following time ] haven't come out on SEDAR yet, so I can't look into the details. Can you give a little more granularity on the revenues for the company? Like what was the NMR sales in the quarter, then sort of RS2D, and then the CATSA revenue?
So Randy here, Stefan. Thanks for that. Looking -- so the way we're describing things here in the filings that you'll see shortly, and I've got my confirmation so you should see them on SEDAR any moment. But we got our company broken up into 2 segments now, our scientific equipment segment, which is comprised of what would have been RS2D, so MRI, high-field console segments, Benchtop NMR as well as third-party equipment sales. And then the Security Services segment, which is predominantly airport security maintenance, but also a little bit of commercial security as well.
So on the scientific equipment side, for the 3 months ended, it was $5.5 million in sales and services were $4.5 million. And then for the year, it was 16.3 for products and 12.1 for services.
Okay. Great. And then just sort of at a higher level. Looking at the CATSA rollout, or I guess rollout is maybe not the right word anymore now that you're established there. When do you guys think you're going to be getting to the full kind of revenue potential of that? Is that sort of a year-end thing? Or Q3? What -- actually the SEDAR filings [ should take ]. When do you think that's going to be happening? What are your internal sort of expectations there?
I would say we're expecting to kind of ramp on a linear basis through 2024 and into 2025, but obviously, we want to push that as early as possible.
Okay. And you also mentioned wanting to get to EBITDA breakeven. So you've sort of targeted EBITDA breakeven for the -- in Q1, you mentioned, and we'll get back to Q1 on CATSA. And then you said the same for the NMR business. But do you mean your overall product part of the business? Is that what you meant to say? And when do you expect that to occur?
Yes. I think the NMR business unit will be a little bit earlier, but product sales will be likely later into 2024 than security services just because of the fact that security services, we've got that we're fully rolled out now and ramping that contract. So I think that will be earlier. We do have some trailing upfront training costs for the last portion of the last kind of cohort of our hirees in that side of the business. We're dealing with that in the first quarter and then into Q2, we're looking for some positive results there.
Okay. And then just maybe give me a sense on the -- again, if you want to call it the product side of the business or the NMR side, what level of revenue do you need to sort of hit to get to that EBITDA breakeven? Like what's the magic number you guys are looking to, to cross over?
That's a great question. I think to hit EBITDA positivity, obviously, we're even looking further down the road to that, to be honest, and looking more at even cash flow positivity and things like that because we have a fairly significant R&D component. But we're looking to see a decent recovery in 2024 over prior year.
As we talked about earlier, we had a tough first half of the year, particularly on the Benchtop NMR side of the business, which we saw recovering. So we're looking to push that up a fair bit, reasonable percentage over our 12 months ended December 31, 2023. And that should -- with reasonable increases in revenue there, I don't think we're too far off of our kind of positive EBITDA numbers with that business unit.
Okay. And given that we're almost in May here, do you guys want to give some color on Q1 and how it came in? You had like very strong like end of the year. On the product side, you tend to have a very strong Q1 and then obviously -- I'm sorry, Q4 and then Q1 is a bit softer. Is that the same pattern we're seeing this year? So we should -- we shouldn't expect sequential growth from the company in Q1. Or any color you want to give on the quarter now that it's sort of in?
Yes. What I would say is we were happy with the activity we saw in Q1. You're absolutely right, Q4 is seasonally our best quarter, typically, and it does tend to come off in the first quarter. And that seasonality in the product sales side is not going to change. But certainly, when you're looking at year-over-year, we were happy with the results and the momentum we carried out of Q4 into Q1. And I say year-over-year just to be clear, like over Q1 2022 -- '23.
You expect to grow year-over-year, but it will be down sequentially, yes. No, I just want to say that's expected. No, that's good.
Yes, exactly. It's in line with our expectations of Q1.
Yes, that's great. And then just finally, on the NRC grant you guys got for $1.5 million. Can you just talk about how that comes in? And just a bit of a bookkeeping for me, and when that can be recognized over 3 years. So is that like a $500,000 a year kind of thing?
Roughly speaking, yes. So it's over 3 years, and it will come in monthly starting in the second quarter.
Okay. And then just finally, you -- I think you talked more broadly about the K'Prime analytical instruments being so stable year-over-year and the headwinds you're seeing last year are sort of abating to some degree. But ignoring that, what's specifically happening in the NMR business? Like how would you characterize the dynamic there? Like you said, you have almost 4 months into the year coming in. What's the pipeline looking like? How would you characterize that? Is that still being impacted by global uncertainty? Or do you guys have figured out the recipe to get the sales sort of dialed up again?
Yes. I think if I look back to sort of H2 of 2023, as central banks sort of stabilized interest rates, I think some of that fear started coming out of the market. And that's what we saw across the product sales part of our business, which is dominated by Benchtop NMR, but we saw the same kind of trends in third-party equipment sales where things started coming back and stabilizing at a reasonable level.
I think there's still a little bit of caution in the market from what I can see, but not nearly to the extent that we had in H1 2023. So we're optimistic about what that means for the business in 2024 that people are back looking at capital equipment purchases as a part of their business models, and that gives us a great opportunity to get our products out there.
Your next question comes from the line of [ Christopher Bo ] from Canaccord.
It's Chris calling in for [ Tania ]. Yes, Stefan asked a question about the CATSA and I'm going to just pick on it a little bit more specifically, just wondering how quickly after turning EBITDA positive, you mentioned that it's around Q1 '24, would you anticipate turning cash flow positive on that contract?
That contract, EBITDA and cash flow are pretty closely tied. There's not a lot of capitalized labor or anything like that, that happens in that services business. In fact, it goes the other way. We've got capitalized labor on our balance sheet from the run-up period that we're starting to bring into income, which is noncash labor expense.
Okay. And you did touch on the backlog. I'm just kind of wondering, are you able to disclose perhaps like how much is lapped or remaining on that backlog?
Yes, let me clarify that -- oh, for CATSA.
For CATSA, yes.
It's -- there's a lot of opportunity there. The customer has got a number of projects that they want us to take on. So that's been on the docket for some time. And the priority in 2023 was just getting that transition completed. So getting to a point where we've taken over all of the basic services, the basic contractual maintenance services so the incumbent provider could move out. And so that happened in January of 2024 as we released. So now it's a matter of us, we've got kind of the basic stuff under our belt so we can start to take on those projects.
I don't have a specific number I can give you on them, but there's quite a bit of work there available for us. And I think that's indicated by the scope of the contract itself.
I guess, my last question is regarding the outlook in 2024 that you mentioned that your company is looking to maintain strength in product sales. Your company did reduce the manufacturing labor force in the product segment. So I'm just kind of wondering, let's see if sales end up becoming strong and your company can -- leads to ramp up. Like how well can your company ramp up considering that segment structure is more lean now?
I think it's more efficient as well as lean. So I actually look at it as a good opportunity for us to be able to ramp up. We've got -- we've made very strategic moves, so we've got a lot of institutional knowledge retained. And my expectation is with continued focus on operating efficiency as well within manufacturing, it will be -- we'll hopefully be able to reduce the number of labor hours per unit, and that will allow us to scale up without adding additional heads.
But if we do manage to see more sales, we've had done it in the past, and we certainly got the ability to train people and get them into manufacturing pretty quickly.
There are no further questions at this time. I will now turn the call back to Nanalysis CEO, Sean Krakiwsky. Please go ahead.
Yes, I'd like to just thank everybody for participating on the call. It was a pleasure speaking with you. And I look forward to the next opportunity. Thanks very much, and have a wonderful day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.