Good afternoon. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nanalysis second quarter 2022 conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you. I would like to turn the conference call over to Matthew Selinger, Investor Relations. Please go ahead, sir.
Thank you, operator, and welcome to Nanalysis Scientific second quarter 2022 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 are subject to inherent risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Certain material factors and assumptions are considered and applied in making these forward-looking statements. These risk factors are included in our filings for the year ended December 31st, 2021. 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, 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 only as of today, and Nanalysis 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 SEDAR system at www.sedar.com. S-E-D-A-R.com. On the call with me today are Nanalysis founder and CEO, Mr. Sean Krakiwsky, and Nanalysis interim CFO, Mr. Randall McRae. With that, I would like to turn the call over to Nanalysis interim CFO, Randall McRae. Randall, please go ahead.
Thank you. Thank you, Matthew. It's a pleasure to join and interact with everyone on the call today in my new role as interim CFO of Nanalysis. While I'm new to this position, I'm not actually new to Nanalysis as a company, as I've worked with them in a consulting basis over six months prior to my joining, and know the company quite intimately. I've been impressed with the company's current business, growth prospects, and vision to disrupt the NMR and MRI space. I jumped at the chance to join the company in my current role when given the opportunity. My goals since joining the company have been to work with Luke Caplette to ensure a smooth transition, as well as to build out my team and systems to support Nanalysis's growth trajectory.
Some of our business segments, like the CATSA contract, are going to require advanced ERP systems to ensure proper controls and management, the implementation of which has already commenced. With that said, I would like to turn to the financial performance of the quarter. All amounts referenced are in Canadian dollars. I'm happy to report for the three months ended June 30th, 2022, the company reported consolidated revenue of CAD 5.2 million, an increase of CAD 844 thousand or 19% from the comparative period in 2021. The increase in revenue is due to revenue added via acquisition of the K'Prime operating segment, offset by slightly lower revenue in Nanalysis and RS2D.
Gross profit for the three months ended June 30th, 2022 was CAD 3.2 million, a margin of 62%, compared to gross profit of CAD 2.9 million at a margin of 67% for the three months ended June 30th, 2021. As discussed on prior calls, we anticipated a bit of margin erosion due to the inflationary pressures on our cost inputs. We continue to evaluate pricing. However, due to a large backlog of sales, the opportunity to increase prices has been temporarily cycled. The company's net loss for the three months ended was CAD 947,000, as compared to the three-month profit in June 30, 2021 of CAD 1.2 million.
The increased loss was due to higher costs, specifically sales and marketing expenses, increased general and administration expenses, and increased research and development expenses, both in the Nanalysis segment and from new acquisitions. Nanalysis has also continued to invest in growing internal processes and structures to support anticipated future growth. As of August 25th, we have 19 100 MHz units in our production queue, worth approximately CAD 2.6 million. We're pleased to announce that as of June 30th, 2022, the company had cash on hand of CAD 12.3 million, an undrawn credit facility of CAD 6.5 million, working capital of CAD 13.5 million, and an undrawn government contribution funding of CAD 5 million as of June 30th, 2022. I'm very confident that we have strong financial base for Nanalysis growth.
With that, I'd like to turn the call over to our founder and CEO, Sean Krakiwsky.
Thanks very much, Randall. Welcome to everybody, and thanks for spending time with us today. As you know from our last interaction, much of our last call was focused on the recent win of the CAD 160 million service and maintenance contract with the Canadian Air Transport Security Authority or CATSA. Clearly, this contract is quite meaningful for the future growth of the company, and I will comment on it in detail a bit later in my remarks today. First, I would like to start off by discussing our Q2 financial performance, which while we are still experiencing significant year-over-year growth, was not where we have been historically and not where we would like it to be.
We have been able to drive triple-digit growth for the past few years, and I believe we can get back on that trajectory in the near future, but we have fallen short of that objective thus far in 2022. There are several reasons for this shortfall. Randall alluded to some of them, but I'd like to talk about a few more in detail and ensure investors that we will get back on track. While pursuing the CATSA contract, which was signed on May 25th of this year, it was an all-hands-on-deck situation and turned out to be quite distracting, requiring resources from throughout the company, especially from our VP of sales. Also, as soon as we won the contract, we began work associated with it, which includes coverage of all 81 airports in Canada.
This is no small undertaking, and I am happy to report that we are currently on schedule with this project. This was all happening while we were trying to integrate our Nanalysis benchtop NMR sales team with K'Prime shortly after the closing of the acquisition. As a result of this very important but quite hectic activity, our top-line results in benchtop NMR and K'Prime third-party product sales did suffer. We have implemented a plan to rectify the situation. The acquisition of K'Prime, which now serves as our sales organization, has brought to Nanalysis a significant change in culture when it comes to the philosophy and structure of sales. For example, we have changed the compensation structure of sales reps to include higher quotas and smaller territories.
Additionally, we have redefined the role of a sales rep to be less technical and more focused on closing business. The technical aspects of closing a benchtop NMR sale will now be undertaken by our product and application experts, which have tremendous knowledge about the customer's technical product requirements. These product and application experts used to be strictly a cost center in our company, but are now being included in the compensation structure directly associated with generating revenue. This change in sales philosophy and structure did in fact result in some personnel turnover of NMR sales professionals in Q2, which in turn did negatively affect revenue, but I believe will be the best for the long-term health of our sales organization going forward.
In this context, we are implementing a plan to increase our benchtop NMR sales organization to 22 sales reps throughout the United States, whose main job is to turn over more rocks, finding more qualified leads, strengthening our sales pipeline. The main job for these people is to close business, not to engage in scientific discussions with customers. These 22 sales reps will be supported by our product and applications experts, who will also be compensated for contributing to the closing of sales. The founder of K'Prime, my colleague Kam Lin, often says to me that sales is a team sport that needs to be played efficiently so that we can scale our sales organization, and I'm fully supportive of this approach despite the short-term growing pains we are experiencing.
With these changes that we are putting in place, I'm confident that we're gonna see a significant rebound in benchtop NMR sales and K'Prime third-party product sales in Q3, and that the remainder of 2022 is going to be quite strong. I'd also like to talk about other aspects of our business, starting off with the QUAD Systems acquisition that is publicly announced. That acquisition is for going upmarket with high-field NMR systems, and those high-field NMR systems have several modules associated with them. We have started generating revenue from some of those modules, but we've also experienced some delays in the completion of other modules.
We remain confident that we will close out the year with quite a bit of momentum associated with QUAD Systems and that we will have excellent visibility on the contribution to 2023 revenue by the time fourth quarter closes. With regards to our MRI group, we remain quite active there. Quite happy to let everybody know that in Q2 we closed a CAD 1 million medical imaging system sale. We recently received notice that we have also won a CAD 1.1 million contract for another medical imaging sale to a university in France.
On the technology front and on the sales and installation front, we remain quite active there in a way that is fully consistent with the strategy that I've talked about you, with you, many times over the years. Also, we continue to make sure that our manufacturing capabilities are incrementally improved so that we're positioned to satisfy strengthening demand going forward. Yes, it is acknowledged that Q2 has been a bit of a weak spot for us. We don't see that as being indicative of any long-term trends. As I mentioned before, we expect to see significant rebound of revenue in Q3.
In particular, with regards to manufacturing, we acquired a state-of-the-art five-axis machining center, which is important for reducing our costs as well as facilitating extra capabilities with product performance. We also acquired a state-of-the-art wire EDM machine, which allows us to make parts that we couldn't make before that we outsourced. Very proud of the continued investment in the growth of our business, in the context of our manufacturing capabilities. As I mentioned before, I'll talk a little bit more about the CATSA project. I'm happy to report that we're on track with that.
Kam Lin, the founder of K'Prime and his team have been tremendous in making sure that the customer is happy with our progress there in covering all 81 airports, starting off with Calgary and Edmonton, which are sort of our home airports. We expect to be generating a material amount of revenue towards the end of the year associated with the CATSA project. Towards the Q1 and Q2 of 2023, we expect to be ramping up and approaching the maximum amount of billing that will occur under that contract, which is over CAD 2 million per month. All in all, our business is on track despite a little bit of a short-term blip.
I also wanna invite everybody to come talk to me more in detail about that. We're having an investor barbecue at our headquarters in Calgary this Friday, which will start at about noon. It's kinda becoming an annual tradition. Like I always like to say to investors, you know, we have a lot of transparency in our company. We invite scrutiny and questions from shareholders. This Friday will be a great opportunity to mingle with employees and seeing a lot of the new things that we have as we evolve our company. Please RSVP to the official email that went out to all shareholders last week.
In closing, I would like to emphasize that our very talented and committed management team is constantly course-correcting as needed, figuring out new ways to drive growth, and confidently moving towards our vision of building a fully vertically integrated global scientific instrumentation company, serving customers in the security, pharma, biotech, food, energy, advanced materials, petrochemicals, healthcare, and education markets with imaging and detection products and services. The company will continue to expand product lines, expand direct sales, service, and channel management capabilities worldwide, and will also strengthen technology partnerships, as well as develop important supply chain risk mitigation and technology differentiation capabilities as the geopolitical landscape evolves, ensuring continued value creation for shareholders. Operator, I would now like to open up the call for questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, simply press star followed by two. If you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you do have a question. Your first question will be from Stefan Quenneville at Echelon Capital Markets. Please go ahead.
Hi, guys, and thanks for taking the question. You know-
Hi, Stefan.
Yeah. Kind of a, you know, definitely a tough quarter and not necessarily the direction we were expecting with the NMR sales. Can you talk a bit about how Q3 is shaping up? Whether the sort of production snafus that you had previously were impacted those sales as well? Maybe talk about any weakness in end markets that may have impacted sales beyond just, you know, the sales force impact you were sort of citing.
Hi, Stefan. Thanks very much for the question. This is Sean, the CEO. We're 2/3 of the way through Q3, and things look very good. In previous years, Q3 has kind of been a weak point for us, but we don't see that weakness this year. One of the things that has recently started to change is that physical conferences are coming back. I had a call today with basically the quarterback of our benchtop NMR sales group, Dr. Max Czmielewski. He's at a very important trade show in Chicago, and he said that interest in our products was higher than he's ever seen before. That's just a little anecdotal evidence that things are good.
In terms of the production side, on the 100 MHz, you know, I'm confident that we're gonna ship somewhere between 18 and 22 100 MHz units for sales in Q3. In Q4, you know, I'm confident that in terms of manufacturing, we're gonna be basically able to manufacture 10 units a month on the 100 MHz side, which is an objective that I've talked about quite a bit. We're on the verge of really not having to talk about constraints in 100 MHz manufacturing anymore. Those are positive signals.
You know, I really, you know, the way our quarters tend to be is, you know, we have a lot of purchase orders that come in right at the end of and towards the quarter, and especially with our 60 MHz, where we're ready to ship them out right away. You know, unfortunately, you know, we had several sales reps that weren't really happy with the new type of compensation structure that we implemented, and they basically checked out, you know, a couple of months before quarter end, and that did really hurt us. In terms of the market opportunity and market demand, I'm not seeing anything except for strengthening demand there. Really, it's just been a matter of execution on our side.
It comes back to this CAD 160 million contract that we won, and that really consumed a big part of our management cycle. You know, happy to elaborate more if you wanna send me in a little bit of a different direction, Stefan, but really, that's my answer to the question. Q3 is looking very good. Q4 is always our best quarter of the year, and that'll be no different in 2022.
Do you feel confident, you know, in the next couple of quarters that you're gonna be hitting that, you know, kind of, you know, doubling of sales that you sort of were at a cadence? Or do you feel that it's more prudent? I mean, you're right. I mean, if you put this in the context of winning the CAD 160 million contract, you know, yeah, bad quarter is worth taking when you've made that kind of contract win. I don't mean to be so dour. Do you feel confident in that sort of cadence?
I think people on this call will understand if, you know, if you're growing at 80% or 85%, I don't think people are gonna be particularly upset when you layer on top of that the cancer win, you know, given that that takes quite a bit of focus for a company your size. I just wanted to, you know, understand that, you know, Q3 is. You know, this is really an aberration this quarter, and things are definitely on track for Q3 and Q4. Then just a sort of follow-up question. Have any sales people been let go of or quit given the realignment? Just maybe a sense of the number there, if you can disclose that.
Yeah, I'll just reiterate that we are very confident that we're gonna resume the expected trajectory, the growth trajectory, in Q3 and Q4. You know, we see Q2 as a sort of an unfortunate anomaly. Again, you know, from my perspective anyways, the biggest cause for it is that, I'm answering the second part of your question now, Stefan, we did have for the first time in our company's history, you know, we had some employee turnover in the form specifically of sales professionals resigning because they didn't like the new direction that our new VP of sales was putting us on, which I totally agree with his new direction.
Again, I mentioned some of the characteristics of it. For example, you know, putting higher quotas on our sales reps and giving them smaller territories. In other words, they need to be more efficient. They need to produce more. These are all characteristics of a larger company's sales organization rather than the sort of culture of a tech startup, right? Which we, you know, in Nanalysis in the past, we would think of ourselves as sort of a tech startup, whereas K'Prime has brought the DNA and culture to a company of a large organization's sales and compensation structure, which we need to have going forward. I wholeheartedly agree with it. Yes, we did lose a couple of sales professionals, but we have replaced them.
We've also augmented the sales organization with, as I mentioned before, these additional 22 commission-only sales professional who are professional analytical scientific instrumentation people. They're not full-time employees of Nanalysis, but they're well known to us through the K'Prime network, largely of Agilent resellers. Their job, again, is to strengthen the sales pipeline and close business. We have all kinds of product specialists and application experts that can support them on the parts of the sales cycle that entails. I mean, we've gone from four salespeople covering the United States now to three, but an additional 22 sales reps that are already starting to provide quotations to customers and work with our application specialists.
I think it's the right thing to do. It's something that, Kam Lin and the rest of the team from K'Prime, including our VP of sales, have been, sort of trying to evangelize me on for a while. I think it's gonna be great for the company going forward and that you'll see the early results in Q3.
Okay, great. Maybe I'll finish on a more positive sort of note and sort of an upside surprise. The MRI contracts that you guys have been winning, I know you've kept your cards pretty close to your vest on your emerging MRI business. Are you ready to maybe tell us a bit more about how that's going, seeing these sort of meaningful purchase orders coming out here and maybe, you know, at a higher level, talk to us about how that business is shaping up and gonna be going from here on out?
You know, we're doing what we said we were gonna do on the MRI side, which is remain very active, you know, generate meaningful revenue. It's, you know, it's not, you know, the largest chunk of business in our company by any means, but it is millions of dollars per year. We continue to develop our proprietary technology, which is fully synergistic with our NMR technology, and working on partnerships that will one day turn into acquisitions, which will catapult us into the human medical imaging side of the business. You know, very active and very proud of our group there. We probably will start to do a little bit more PR about some of our contract wins in that area.
Our strategy all along has been, you know, between now and, you know, sort of the end of 2023, to just gradually and steadily ramp up our resources on that part of the business, and then again with acquisitions that will resume probably not mid-2023. We need to see the equity markets, kind of, straighten out a little bit more. By the end of 2024, my plan as CEO is to resume acquisitions, and specifically to get into the human medical imaging side of the business. Really, that was just a long way of saying, nothing's changed except we've made the progress that we said we were gonna make.
Well, great. That's all for me. Thanks, guys.
Thanks, Stefan.
Next question will be from Brandon Austin at Venator. Please go ahead.
Hey, Sean. How's it going?
You know, I've been better, but things are going very well and great to hear from you, Brandon.
All right. Well, we'll see what happens tomorrow. I guess with people listening, it's probably a good idea to just get everything, all the questions asked rather than to take things offline so everyone's on the same page here. Just let me just go through my list here. Some of this was a little repetitive with the analyst. The cash, the CAD 12 million in cash, is that unencumbered cash? That's your cash, that's not including QUAD's books or not QUAD, sorry, QUAD.
QUAD Systems in Zurich.
Yeah.
It does include, and I'll maybe ask Randall to kind of complement my answer after I say a few things. It does include the cash in QUAD.
Mm-hmm.
In that sense, a portion of it is encumbered. Remember, we also have an OEM contract with QUAD Systems. You know, that's the way that we get access to that cash is when they place an order for our electronics console, they pay us for that. It does include the cash in QUAD Systems. Randall, do you wanna add any color to that?
Sorry. How much is yours?
Randall, would you like to add some color to that and give Brandon some specific numbers?
Absolutely. Hi, Brandon. How are you doing?
Good. Good.
Unencumbered, CAD 6.8 million at Q2.
Okay. CAD 6.8 million. Okay. So that's there's a decent buffer there. And how many, when I'm looking in the quarter, the CAD 3 million in revenues from Nanalysis, how many units did you move? Like, I know when the first quarter call came out, in the first quarter, you moved 10 100 MHz units, I think. And then we talked a bit about an order backlog. But you know, I mean, one of the problems with a company your size, like a great quarter is 15 units and a crap quarter is 7 units. I mean, you know, we're dealing with such small numbers, but they're high-ticket items. So I just curious how many you were actually able to move in the quarter.
Yeah. We were able to ship 13 100 MHz units and 18-
Mm-hmm
60s.
Okay.
Brandon. Yeah. Brandon, I'd like to just point out there because it kind of goes to the heart of what everybody wants to know, and this is a little bit more detail. You know, the 100 MHz thing was still in, you know, it was production issues, which we have overcome, but in Q2 we hadn't yet. On the 60 MHz side, that's where we really fell short because of, you know, I'll say three sales reps quitting in the quarter.
Mm-hmm
Sort of checking out before their last day, sort of we didn't get the really strong finish in 60 MHz POs that we normally would in Q2.
Okay. While we're dovetailing into the sales issue. Right now, you suggested you have 22 direct sales people. Did I hear that number right, which includes the K'Prime sales people that can sell these units?
That's true. Right now we have a blend of sales professionals that are employees of our company, but we've also added on 22 commission only sales professionals that are under contract, and that was facilitated by K'Prime's network of companies that they worked with in the past.
Mm.
It's a new set of sales professionals that are knowledgeable in our space, already knocking on the doors of customers. The contracts entail 6% commission.
Mm-hmm.
That's sort of the new part of our sales organization. It's something that K'Prime was sort of pushing to do sooner, and now I wish that I would've pulled the trigger on that sooner. Nevertheless, it's in place now, and it's going to be paying dividends here in Q3.
Okay, sorry. Let's just clarify that. You have 22 sales people that are indirect through K'Prime?
Yes. The K'Prime in the last couple of months since the changes have occurred, have been signing up these commissioned only sales professionals that they-
Mm-hmm
Worked with in the past. In other words, they're, but they're not full employees of our company. They're commissioned-
Sure.
... only, and their compensation is 6% commission.
Okay. How many direct sales people do you guys have under your employ through K'Prime and Nanalysis at this point?
Right. For Canada and the United States.
Mm-hmm
We now have six that are focused in on benchtop NMR. We lost three, and we've since replaced them. Then we're augmenting them with the 22 and-
Mm-hmm
Changing the way we start and end the sales cycle. In the past we would have a sales rep do 75% of the work to close a sale.
Mm-hmm.
A big chunk of that would be highly technical. 25% would be support from our technical group. Now basically that's flipped. We're gonna have these 22 sales reps do 25% of the total work, including establishing the qualified lead and then closing on the purchase order. 75% of it will be done by, you know, what I'm gonna refer to as our application and product technical specialists.
Mm-hmm.
We're adding to the number of sales professionals we have there, and then we're changing the way we close a sale, in terms of the sales cycle. I mean-
Okay.
Go ahead. Sorry. Go ahead, Brad.
Sorry. I'm just trying to think 'cause these guys aren't exactly employees of yours. You're leaning on K'Prime's expertise in this space to basically tell you that a 6% commission is enough for basically a lead gen organization relative to. Like I thought K'Prime would be more of the sales organization going forward, and I understand they have their hands full with this big contract. You know, that K'Prime's comfortable that using this external sales force, they'll be incentivized new product. I guess benchtop NMR is somewhat unique to you guys relative to the competition. I guess they don't really have competitive products that they could engage that would be competitive with you guys. Is that generally the idea?
Yes. They're already knocking on the doors of the same customers.
Mm-hmm
That we are. They sell complementary products and services.
Mm-hmm. Mm-hmm
Not competitive products and services.
Okay. What did you guys say? Did you guys mention something about the NMR backlog was 16 units, CAD 2.6 million. I'm not sure if the backlog's the right number. You guys mentioned something in the prepared remarks.
Yeah. That was 19 units of 100 MHz products.
Oh, okay. The 19 units was okay, and that's the backlog then?
CAD 2.6 million. Yeah.
Okay.
CAD 2.6 million of 19 units of 100 MHz backlog.
Okay. You guys said that you expect or you've already sold, and again, you guys said it, so I'm not putting words in your mouth, 18-22 100 MHz units in Q3. Is that the-
That's my estimate.
That's the target right now?
Yes.
Okay.
That's my estimate of how many 100 MHz units we will ship against POs in Q3.
Okay. You'll have sixties on top of that?
Yes.
Okay. We should expect a pretty healthy rebound, possibly a record quarter in Q3 in terms of Nanalysis segment revenues. Is that a fair statement?
Yes
Using those numbers? Okay. Just a few more items here to knock off. I mean, it's good because you guys will be getting back on track and it looks like that's, you know, fairly with fairly good visibility. You said the airport contract starts ramping up in Q4 and then won't be fully ramped up until Q3 of next year?
Yes. Essentially, yes.
Okay. That's good. We should be getting incremental revenues on K'Prime by Q4. I mean, I know I always ask you because I understand technologically it's attractive, but financially it's just impossible to figure out what's coming through, and it really is bumpy and messes with your numbers. Can you sort of give me the explanation, the excuse for whatever it might be for the RS2D? I mean, when you guys talk about, you know, we missed or whatever, the biggest component of the miss is RS2D coming in at CAD 300,000 versus CAD 1 million, you know, one last year. Can you just run me through what again causes that division to go up? I mean, I have notes here, but I never quite seem to-
YeahYeah.
... to you know put together what causes that division to be so volatile in terms of top line.
Yeah. Essentially what it is is that the OEM contract with QUAD Systems is via our RS2D security subsidiary.
Mm-hmm.
Last year, that wasn't the case. Whenever we would be able to book revenue from RS2D to QUAD Systems, that was revenue for Nanalysis Scientific. Now, because QUAD Systems is under our control, when the sales occur between RS2D and QUAD Systems, we don't get to book that revenue. It's an intercompany transaction.
Mm-hmm.
When you say, when I say the QUAD Systems' revenue generation to external customers has been delayed, then.
Mm-hmm
Basically that amount of revenue is also been delayed. As soon as the QUAD Systems product is ready for market and the revenue starts to increase there, and it will.
Mm-hmm, mm-hmm.
You will see that revenue immediately jump back into our consolidated revenue. There's a portion of it that is basically disappeared because it's intercompany revenue.
Right.
We don't get to book it anymore.
QUAD Systems is, and RS2D, that's gonna show up basically as the same line. There, you're gonna have three segments, Nanalysis, K'Prime, and RS2D/QUAD, basically.
I'm gonna let Randall elaborate on this from an accounting perspective.
Sure.
I'm gonna comment on it from a business person's perspective.
Mm-hmm.
The way I see our business going forward is there's five parts of our business that I think about. One is, and I'm gonna answer your question directly, but it's also.
Mm-hmm
Gonna be in context, Brandon.
Mm-hmm.
One is benchtop NMR.
Mm-hmm.
Right? That's, you know, you can think about as the historical Nanalysis company.
Okay.
The other one is high field NMR, where we go up market.
Mm-hmm.
That's QUAD Systems, or it will be.
Yeah
QUAD Systems. There'll be a K'Prime third party sales. There'll be our-
Mm-hmm
...security business, so that would include the CATSA project, but other security service revenue. Then you'll have MRI, which will also be driven by RS2D. In effect, and this is sort of the direct answer to your question, in effect, RS2D is ceasing to be MRI and high field NMR, and it's going to-
Mm-hmm
It's gonna solely be MRI. The high field NMR part you will see coming through QUAD Systems. Those are the five categories that I view our business as. You know, in terms of the segmentation that we're obligated to provide, from an accounting perspective and so on and so forth, it's gonna take Randall some time you know to have a one-to-one correlation between those five types of product offerings that I think is important and to how that shows up in our MD&A and so on and so forth.
That's fine. If I'm looking at RS2D sales, you're saying that part of the reason those sales are down CAD 700,000 is because that CAD 700,000 used to be revenues from Quad. Now that you guys, you know, effectively control Quad, those are intercompany right now?
Yes, correct.
Okay. That's like CAD 700,000 or is that, I mean, I guess it's tough to say now because it's all intercompany right now.
That's, you know, you're on the right track. That's ballparkish.
Yeah. I don't really wanna penalize you, or we shouldn't penalize you too much just because RS2D went down. That's really just a function of what QUAD's doing. Basically if RS2D is down, it's because QUAD is having these delays, not because RS2D is, you know, doing less business, you know, in a vacuum.
That, that's correct. Just to provide a little bit more color there, the ways in which we used to do the high-field NMR sales out of our RS2D subsidiary is quite a bit different than the way QUAD Systems wants to do sales. QUAD Systems is a Swiss company with a lot of former Bruker employees who are all Swiss and German. They're electing to take a different approach with how they go to market, and they have some very lofty objectives, like taking away 20% market share away from Bruker and so on. I agree with their approach.
It's different than the approach that we had at RS2D, and that I was more directly involved with, even in terms of actually making sales myself. It is caused, I'll call it, a three-month delay in sort of the revenue spigot being opened on the other end.
I think that's all I've got for now. Maybe we'll talk offline a bit more about some of the details here 'cause they're still eluding me a bit on sort of the sales makeup and what's going on with QUAD. No, that's good. It's a good start, and it sounds like Q3 is gonna be a nice bounce, and it sounds like these security revenues are gonna start kicking in in the next six months too. Hopefully this is the low point.
You know, you're absolutely right, Brandon. We think we're gonna have a great Q3 and Q4, and I look forward to talking to you anytime. Please give me a call anytime that's convenient for you.
All right. We'll speak to you soon. Thanks.
Thanks, Brandon.
Next question will be from Richard Helle at BJA Magnetics. Please go ahead.
Dr. Krakiwsky, it's good to hear you in such positive tones.
Oh, thank you very much. It's great to hear from you. Unexpected call, but great to speak with you.
Well, the concern is, as an investor, I'm disappointed I didn't get invited to the barbecue tomorrow.
Why can't you just hop in your private jet and fly out? We'd love to have you.
No, my jet can't go to Canada. Well, not yet anyway.
Okay.
Hey, tell me something. I missed something early in the conference call, what you said that QUAD is under your control. Now, are you 100% at this point, or are they 4 7% or 49% or whatever? Have you acquired the balance of QUAD?
No, we have not yet. We own 43% of the company, but our auditors, Ernst & Young, have deemed that we have de facto control because of the seats we hold on their board of directors, and then more importantly, the contract we have in place with them to have a unilateral option to acquire the remaining 57% of the company at a predetermined price. So it's because of that that we have de facto control and that according to IFRS, the auditors have instructed us that we must consolidate their revenue into our revenue. The flip side of that is that we are not allowed to include the intercompany revenue that occurs between QUAD Systems AG and RS2D.
Right. Number two, the CATSA project is I guess I don't understand. Is that more an MRI or an NMR type of product?
It's a general scientific instrumentation service contract. In airports, there's several different types of equipment, including, you know, mass spectrometers that they, you know, when they brush that little piece of cloth on your laptop to determine if there's been explosives-oriented residue on your laptop or on your hands. By the way, they're looking for nitrogen when they do that. There's an example of a piece of scientific instrumentation that's in an airport. Of course, there's all the imaging systems as well that we've all been through. Our wholly-owned subsidiary, K'Prime, won a CAD 160 million contract to keep all of that equipment up and running. It's quite a lucrative contract by its nature.
Number one, that it's a critical service, and that it's with the Government of Canada, effectively.
That's great. Did you suggest CAD 2 million per month is what, the total of those number of airports will generate?
Yes. Once we complete the phase in period, which we expect to be in Q1 or Q2 next year, then we expect to be in a position to bill them for over CAD 2 million per month. We expect material revenue from that customer in Q4 of 2022 as well. The project is on track and ramping, and we're very enthusiastic about that opportunity.
Well, that's great. Great to hear some positive things after your investor, Brandon, sort of raked you over the coals with some negativism. Great to hear some positive things coming out.
Thanks very much, Rich. Really appreciate the call, and I look forward to talking to you again soon.
Very good. I hope that happens quickly.
Absolutely.
Thanks, Sean. Take care, Randy.
You as well. Good to hear from you.
As a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. Your next question will be from Fred Orr, Investor. Please go ahead.
Thank you. Hi, Sean, or whoever. I have two questions.
Hi, Fred.
One, the QUAD Systems imaging sales that you referenced, can you tell me what level of resolution you're achieving with those instruments compared to Hyperfine's units that are in sort of an initial commercial distribution?
Yeah, by the way, those would be through our RS2D, not QUAD Systems per se.
Oh, thank you.
QUAD Systems is associated with high-field NMR spectroscopy. We do sell custom MRI systems through our subsidiary called RS2D. Part of those are a common technology platform that is shared with NMR spectroscopy. The biggest difference between what we're doing on the MRI side currently and what Hyperfine is doing is that we're still a high field, and we're still using superconducting magnets.
Got it.
It means that our resolution and also sensitivity is more than an order of magnitude better than the Hyperfine equipment, which is at 0.064 Tesla, which is referred to as ultra-low field. I guess I'm just gonna sort of beg to differ with you in terms of the commerciality of their product.
Fair enough.
Our CTO is very, very familiar with theirs. Their product basically has the hope that one day artificial intelligence will be able to pull the MRI image out of the raw data, but the hardware itself does not produce a useful image because it's at ultra-low field. The resolution would amount to basically a blob, whereas our resolution would be down to the hertz level. There is some promise there in terms of the artificial intelligence aspect of their product concept. If that ends up working, then it'll work even better at higher fields, which where we're planning to be.
Excellent. I'm sorry, I thought you had said earlier in the call that those million-dollar imaging systems were medical imaging, so I assumed they were MRIs. They're actually NMR.
All I did was I pointed out that NMR and MRI are very similar regarding the basic math and physics. But no.
Mm-hmm.
No. The systems that we did sell are imaging systems. One is pure MRI, and then the other one is actually different modalities. Again, I pointed out because it was a relatively big contract win.
Yeah.
Also to point out that we're active in that area in terms of the, you know, in anticipation of go-to-market strategies. It's not all about science and technology, but there's other aspects of it as well.
Yep.
The 1.1 million dollar one is in fact a pure MRI at high field. I believe 3 Tesla.
Oh my goodness. You're much further along in that product area than I had anticipated. Let me move on. That was a great answer, thank you. Very helpful. Secondly, it appears to me, please correct me if I'm wrong, that the last 12-18 months incoming order rates for your 100 MHz NMR product have been about three units per month, and that's a bit of a guess on my part. You now say you are either at or close to a production capability of 10 units a month. Does it make any sense for you guys to perhaps close the price gap between your 60 MHz and your 100 MHz machines? I believe a 100 MHz is still priced at triple the 60, and it's not selling well.
I know you've had some sales disruptions, but by your own admission, those were mostly in the area where the 60 MHz was being sold by the departing salespeople. The incoming order rate is very small relative to your marketing effort and has been since early last year. In my view, it's not selling well at all, and I think maybe it might be because it's overpriced. I don't know. What's your response to that?
I guess I'm gonna respectfully disagree, but I think it's an excellent question that you pose. My comments on it would be that you know the because of our well first if we wanna go a little bit back further we suffered from a lot of product development delays. We suffered from manufacturing delays. The impact that had on the sales and marketing front was that we've been trying to sort of keep the lid on demand because we've been worried that we wouldn't be able to fulfill orders. Now that we've turned the corner on that, yeah.
Now that we've turned the corner on that, and we basically rebuilt our sales organization and then sort of re-vectored some other aspects of our company that are gonna support the sales organization more aggressively, we're gonna be able to be more aggressive on the marketing and sales of the 100 MHz product because we know that we can fulfill orders.
That was exactly the answer.
They're hot, and I just wanna go ahead, sorry.
I wanted to hear. I said that's exactly the answer I wanted to hear. Thank you very much. No, seriously, that's an excellent characterization of what's happened over the last 12 months. That's all I had.
Okay.
I'm gonna let other people onto the call. Thank you, for your time.
Yeah. Thanks very much, Fred. It was a pleasure.
Thank you. At this time, we have no further questions, so I would like to turn the call back to Mr. Krakiwsky. Please go ahead.
Thanks very much, operator. Thanks to everybody for getting on the call. I really appreciate it. You know, one of the favorite parts of my job is talking to shareholders, whether they're new or old. I look forward to further opportunities to do that. I'd like to wish everybody a wonderful rest of your afternoon or if you're in the East Coast, a wonderful evening. Thank you very much.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.