Good afternoon, ladies and gentlemen, and welcome to the Nanalysis Scientific Q1 2025 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, May 28, 2025, and I would now like to turn the conference over to Mr. Matthew Selinger, Investor Relations. Please go ahead.
Thank you, Operator, and welcome everyone to Nanalysis Scientific's First Quarter 2025 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 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 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. On the call with me today are Nanalysis Founder and CEO, Mr. Sean Krakiwsky, and Nanalysis CFO, Mr. Randall McRae. With that, I would like to turn the call over to Nanalysis CFO, Randall McRae. Randall?
Thanks, 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 first quarter, which ended March 31, 2025. All amounts referenced are in CAD. Financial highlights for the three months ended March 31st, 2025, include for the three months ended March 31, 2025, the company recorded consolidated revenue of CAD 10.6 million, a decrease of CAD 570,000, or 5% from the comparative period in 2024. Gross margin percentage on product sales was 66% vs. 47% for the three months ended March 31, 2025. Improvement in gross margin percentage for benchtop NMR is materializing as average selling prices have improved and manufacturing cost reductions started in 2023 and continued into 2024 have taken effect. Security services gross margin percentage in the quarter was 6% vs. 8% in the prior year comparative period.
As a result, the higher cost of service in the quarter, including overtime wages. The company has begun a specific program to improve efficiency and margins within this project, given the setback seen in Q1 2025. Adjusted EBITDA is used by the company as a proxy for operating cash flows available for reinvestment into the company and to service financing obligations. Adjusted EBITDA for the three months ended March 31st, 2025, was CAD 180,000 versus an adjusted EBITDA loss of CAD 104,000 in the same period last year. This was primarily the result of 19% improvements in margins for product sales, as well as the effects of cost reduction measures taken in 2024. Net loss was CAD 1.3 million for the first quarter of 2025, which is an improvement of CAD 1.2 million over the same period in 2024.
The decrease in net loss is due to improvements in product sales gross margin, the effects of 2024 cost reductions taken, lower depreciation due to the impairment of an acquired tangible asset in 2024, and finally, the fact that losses from associates are no longer recorded in the consolidated statement of loss and comprehensive loss due to the impairment of the Quad investments in 2024. We're happy to see continued solid performance in our benchtop sales. While product sales were down slightly year over year, we were able to benefit from much improved gross margins, up 19% from a year ago. The margin improvement in benchtop has been a direct result of hard work and focus both on sales and efficiencies in manufacturing. We believe we can sustain these margins and gross sales through our new products and innovations and a continued focus on efficiency in manufacturing.
We have turned that same focus on operations and efficiency to the security services segment. The company welcomes Mark Tomlinson as its new EVP of Services. With his extensive background in strategic operations management, the company believes it will quickly return to its services growth trajectory seen in the first three quarters of 2024. Changes will center around workload management, process improvement, and continuing to implement automation and tools to help our team deliver their services effectively and efficiently. While our current results have enabled us to continue to achieve adjusted EBITDA positivity for four consecutive quarters now, we have work to do, and we're going to keep our heads down and stay focused. We're confident we can drive change that's within our control.
As we continue to look to continue improving gross margins in the security services segment, we do expect adjusted EBITDA to continue to improve while we work towards our goal of overall profitability. Finally, I'm pleased to announce that we've negotiated the renewal of our term loan with our bank, including a 12-month reduction in principal payments, as well as company-friendly government testing in 2025. With that, I'll turn the call over to our Founder and CEO, Sean Krakiwsky. Sean?
Thanks very much, Randall. I think everybody knows that in the last several months, there's been some significant global economic headwinds that everybody has encountered, mostly due to the uncertainty created in the United States with regards to budgets, tariffs, and so on. Very proud of the way we've kind of persevered through those uncertainties. Admittedly, we're all a little bit disappointed in revenue coming a little bit late and below expectations that we had, certainly at the end of last year, but very proud of the fact that we've been able to generate positive EBITDA and also CAD 2.7 million of positive operating cash flow as we continue to drive towards our ultimate objective of positive net income. I do want to emphasize that our products are not subject to tariffs going into the United States.
We are USMCA compliant, and despite uncertainties and so on, it is my opinion that we will not be subjected to tariffs going into the United States in the future, although admittedly, others have different opinions, but I'm fairly confident on that matter. With regards to the specifics in our benchtop NMR business, we had an exciting product accomplishment in Q1, able to make our first shipments of our next-generation 60 MHz technology, which is on the same technology platform as our 100 MHz product and has over twice the performance of our old generation 60 MHz technology. We feel like that's going to result in sales growth as well as open up blue sky partnering opportunities. Very proud of our team on that, and we have been shipping to customers with excellent customer uptake.
I'm really excited about the ongoing software applications that are being built for that new product and our 100 MHz, including software associated with driving adoption in pharmaceutical quality control part of that market. We continue to leverage our core magnetic resonance technology by incubating our MRI group and products associated with human medical imaging. We are working on several exciting partnerships there with established human medical imaging companies that are using the same electronics and software in the form of our MRI console that exists in our benchtop NMR products. With regards to High-Field NMR, we continue to make progress there with our partner that we own 43% of, soon to go down to 38% because they were successfully able to raise money at a decent valuation and are taking their product to market. They do have a commercially viable product that is selling.
I am referring to Quad Systems in Switzerland. I just visited their facility, and the founder of that company, Dr. Clements-Kessler, was very proud of some recent contract wins that he conveyed to me, which we will talk about in the future. One of them was actually a win at a prestigious university in Canada. Despite some of the accounting treatments that we implemented in 2024, I am really excited about the potential of that part of our business. With regards to third-party equipment sales, which, to give everybody a refresher, is mostly the selling of Adjuvant scientific equipment, we performed in a stable fashion in Q1, and we have a positive outlook for that for the rest of the year.
It is our intention as a company over time, and I'm talking about over the next couple of years, to sort of minimize the selling of other people's technologies as our product portfolio continues to grow and get more robust and is adopted more widely. That activity is still a significant part of our revenue today. With regards to our security services business, as Randall alluded to, over the last 18 months, we've made tremendous progress there, taking that business from negative gross margins to positive gross margins. Recently, we felt like we had stalled with regards to some of the important KPIs on that business, and therefore, in a decisive fashion, we made some leadership changes.
I, too, would like to welcome Mark Tomlinson to our company, who's just been with us for a short period of time, but already been an incredible addition to our leadership team. If you look at his profile, you see that he spent almost a decade with NATO involved in procurement of cruise missiles and F-15s and things of that nature. Fully well-suited for the security vertical that we plugged him into in charge of this CATSA contract that we're operating. We feel like Mark is going to be able to restore the trajectory of strengthening gross margins, which, again, has an objective to get to 50, sorry, excuse me, to 25% and then ultimately towards 30%. We feel like we had a great 2024 with regards to that business and then just need to continue to evolve.
Some of the strengths that are required to take a business from CAD 25 million a year to CAD 50 million a year are not necessarily the same strengths that are required to take that service business from inception and zero revenue to CAD 25 million. Just a natural evolution there that we think bodes very well for the company. In terms of an outlook for our overall business, we feel like we're managing the uncertainties that are stemming from the U.S. political environment well. Although we did experience some softening of revenue in Q1, we're still confident in our overall 2025 forecast, and we feel like we're going to make up, if not all of our lost ground, a significant amount of our lost ground throughout the rest of the year.
We are seeing good strength in our sales funnel and also in our opportunities to grow the services business. We remain confident in the 2025 outlook despite some of the headwinds that pretty much all companies have experienced in Q1 due to the macro environment. Lastly, I'd just like to thank all of our shareholders for their continued support. I really appreciate the precious capital that they've allocated to our company. I'd also like to thank our magnificent employees who continue to add a tremendous amount of value to our business every day. With that, I'd like to turn it back over to the operator 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. 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 Max Czmielewski from Ventum Capital Markets. Please go ahead.
Hi, Sean Krakiwsky. It's good to see you guys put out some solid positive EBITDA. I guess just in terms of maybe where the margin is struggling, can you maybe speak to the labor dynamics that might be dragging on the security services side? Are you having staffing challenges, or are these sort of one-off placements where some overtime outlay was required? Just give me some color on that, if possible. Thanks.
Yeah, no worries. Max Czmielewski here. It's a number of factors, and overtime outlay is, in certain circumstances, part of it. I think for the last 18 months, a lot of our focus has been to get the project up and running, make sure our customer is happy with our services, and ensure we're delivering. As we said previous to this, we want to start grinding out some more efficiency there and making sure our full labor force is effectively deployed across the contract. That's what we expect to see some progress on in the next couple of quarters.
That's great. Thanks. I guess just on tariffs, the broader topic there, USMCA compliant, there shouldn't be any, I guess, direct negative impact of shipping to the U.S. Is this an ongoing story of how you're looking at institutions that might be sort of tightening budgets and what purchasing looks like? One, in Q1, and two, what the pipeline appears or the health of the pipeline appears to be, given the broader concerns about sort of the macro picture?
Yeah. Thanks very much, Max. This is Sean. I think people are getting sort of used to the uncertainty despite the fact that the uncertainty isn't going away, whereas several months, there was sort of an element of surprise and shock to this whole thing. We haven't lost business, but certain types of business have stalled. Customers like the FDA and the EPA are customers of ours that we expected significant orders in Q1, but they've kind of gone into a holding pattern. We don't know how long that holding pattern is going to last. I mean, everybody on this call can watch CNN and the news just like I can. We are sort of confident that it'll clear itself up before the end of the year.
We're just not sure to what extent it's going to clear itself up in the next six weeks or something like that. Just in terms of our general sales funnel strength, we're seeing good strength.
Okay. That's great. Thanks, guys.
Thank you. Once again, should you have a question, please press star followed by the one on your telephone keypad. Your next question comes from the line of Christopher Pu from Canaccord Genuity. Please go ahead.
Hey, everyone. Yeah, I just got perhaps a couple of questions here. In regards to the kind of in Europe, let's kind of go across overseas to Europe. I mean, we may have Germany passed their historic defense spending bill, and there's an idea that European security investment spending would be going up. I'm just wondering if I can get some of your thoughts on implications for perhaps your detection business over there.
Yeah. We do have opportunities over there associated with the phenomena you just described in France, for example. It's developing sort of slowly but steadily for us. I mean, I can't really pinpoint what month we're talking about, but I do see it as a tailwind going forward, yes.
Okay. Thanks. My other question is in regards to your automated industrial analyzer for detecting the illicit drugs. Do you have any updates on that from the development side?
Yeah. There are several aspects to that technology. There are AI parts of it. There are database parts of it. There are hardware parts of it. We are making steady progress there. We do have traction with beta users, important beta users, including law enforcement customers in Germany that is helping us evolve that. I cannot give you sort of full visibility on a full-blown product launch yet, but I can tell you that it is progressing well.
Okay. That's great to hear. Yeah. Thanks for your comments . I'll turn it over.
Thanks, Chris.
Thank you. There are no further questions at this time. I would now hand the call back to Mr. Sean Krakiwsky for any closing remarks.
Thanks very much, operator. Thanks for those who asked the excellent questions. Randall and I and Matt look forward to the next opportunity to talk about our business with all of you. Thanks for joining our call today.
This concludes today's call. Thank you for participating. You may all disconnect.