Good morning, everyone. There's Sean. Can everyone hear me? Yes.
Morning.
Morning. What I might request is if everyone could maybe mute their microphone. Yeah, I'm gonna request again. I'm not sure if everyone can hear me. Could everyone please mute their microphone?
I believe you can if you are the organizer.
Yeah, I'm going to mute.
Yeah, Matthew, normally the moderator should be able to mute everyone, somewhere.
Yeah. Is that better?
Is that better?
I think I've muted them. Sorry, had to go and find each one. Thank you for joining us. Obviously we had the call yesterday. I'm not sure if everyone was able to listen to the replay. That is obviously on the Nanalysis website, under Investors... Nanalysis, under Investors, and then there's a big tab called Events, and there's a replay there. I apologize. I'm trying to go through and mute.
Yeah, I'm just helping with that. If I mute anybody inadvertently here, apologies now. I'm just trying to help Matt with that.
Great. Thank you. Obviously the format here is, you know, question and answer session for management. You know, with that, you know, feel free to. You can type in a question. You also then can obviously go and, if you're muted, click on your microphone and then, and ask a question out loud. It's kind of an open format. We did this once before, and I think it went very well. You know, I've got a couple questions that have already come in, but please, I'd like to just. Sean, if you wanna say any maybe opening comments, and with that we'll open the floor for questions.
Sure. Can everybody hear me? Okay. Thanks to everybody for joining the call. It looks like we have a fairly decent turnout here. I see one of our directors is also on the call, Guido Cloetens, so thank you very much for that, Guido. Yeah, you know, we felt we had a good quarter. You know, we're by no means finished the work that we have to do. You know, I feel like we're right in the middle of, like, a crucible kind of period of our company, where we've invested a lot of money in several initiatives, and we're trying to get them to bear fruit sort of almost simultaneously.
To me this is a transitionary period for our company, and when we come out of it, you know, and I like to say in March, I think we're gonna be a totally different company with the potential for significant cashflow. You know, all of our, all of the synergies that we've put in place are gonna be manifest to shareholders. We're really excited about it. A lot of hard work is taking place right now, and we're very optimistic of where we're gonna be, you know, not too many months from now. Happy to discuss further.
Sean, maybe you can elaborate a little bit on the CATSA contract, the big contract, that Nanalysis was able to obtain, as to how that evolves and when is the contract and the execution of the contract gonna be on full speed?
As many of you know, we signed the contract on May 25th, 2022. In the contract it says that we had to get to full operations in 12 months. We set an objective for ourselves to do it between six and nine months. I'm pleased to say that we are on schedule for that. As of November, we have started to service several airports in Canada under that contract. We expect that contract to be cash flow positive in March. Approximately CAD 3 million is going into ramping that contract up, mostly in the form of hiring the service people and doing the associated training of those service people.
The contract entails providing service for all scientific equipment in 81 airports in Canada. You know, things like having the employees with the appropriate security passes and those kinds of things also are part of the contract. It's quite a lucrative contract. You know, once we get to the maximum billing, and we won't be to maximum billing in March, the project will be cash flow positive in March, but we won't be to maximum billing in March. Maximum billing rate will be approximately CAD 29 million per year. I expect to be, you know, close to that maximum billing rate, more towards the end of 2023. At that maximum billing rate, we expect to be able to operate it at fairly lucratively.
you know, I've been saying 15%-20% EBITDA margins, but I'm actually quite optimistic that we're gonna be able to do better than that once we get to the maximum billing rate part of it. Then it's a five-year contract, so you can think of it as CAD 20 million-CAD 29 million per year for five years. A lot of stability in terms of cash flow there for our company, take away some of the lumpiness that tends to exist in capital equipment sales. To the extent we're able to operate it, you know, profitably, then it will be able to fund other aspects of our business like R&D, which we currently capitalize, and future acquisitions as well. Very, very happy about the contract.
Sean, talk about cashflow. You know, another question that was emailed in is, you know, when do you expect to turn to profitability?
Maybe I'll let our CFO, Randall McRae, talk about that a little bit.
I'll, you know, as I said yesterday on the call, I'll call your attention to our income and loss from other items on our profit and loss. If you look below the line, the majority of those items are non-cash items and/or one-time non-recurring items. You can see for the 6 months ended, at the sales rates we were at, even with the costs incurred to roll out CATSA, we're actually very close to breakeven. Once the CATSA project, as Sean said, we expect to be able to operate it, you know, our target is a minimum of 17%-20% EBITDA margins. Once that's fully operational, we do expect to be profitable. That's our target.
There's a question, typed in here. You know, Sean, you know, when is the company gonna boost sales in Europe? You know, are you monitoring public tenders in Europe, you know, things like such as airports and public health? Beyond that, are there any kind of partnerships going on for penetration in Europe?
Yeah. With regards to the security service business, our strategy is to succeed with the current contract and then start to, you know, to go to markets like Europe and bid in those markets with, you know, the Canadian government as a customer testimonial. We are bidding on contracts in the United States now for in the security business and we expect that to continue to ramp up slowly. With regards to Europe and other parts of the world, we're not quite ready to expand there yet for the security business. We do, of course, sell our benchtop magnetic resonance products in that market. We sell in places like France and Germany and Switzerland direct.
In markets like the Nordic countries and UK, we sell through a network of dealers. To be honest, I don't think. I think we've done an excellent job of selling in the United States. I think there's room for improvement in Europe. You know, we're gonna expand our direct sales presence in Europe. We seem to be able to do better with direct sales or sort of a hybrid model where we have direct sales and channel management and a distributor in a particular region. We're probably gonna expand the direct sales part of our organization in Europe.
The recent acquisition that we did of the Swiss company, Quad Systems, which also sells higher-end magnetic resonance products, will be part of that direct sales strategy going forward. We've just hired an additional sales rep out of Germany. We'll continue with that trajectory.
Another question I've received, Sean, and maybe kind of a hybrid this, is can you give an update, you know, on the Bosch project or partnership announced a while back, and then maybe, you know, potential other partnerships in the same kind of vein?
Yeah. Thank you. Yeah, You know, to a large extent during the pandemic, you know, our business kept marching forward, but the one area that did suffer, was the partnership area.
Okay.
Especially with big companies. We had two partnerships in particular that were affected by the pandemic where the large companies just had a change in priorities, right? One of them was Bosch. That project is still alive. The agreement is still in place, but the activity has stalled. We've continued to try and resurrect it, but I don't have any more information about that yet. As soon as I do, I will communicate it. We of course, are looking for new opportunities as well. Just recently, we had an opportunity to talk to a new partner that will take us deep into the food and beverage vertical, and things are looking good there.
I can't talk about specifics, but it's a very old Swiss company that sells all around the world to, you know, to customers like Nestlé and Kraft and so on. Really excited about the potential to take our magnetic resonance, our bench top magnetic resonance products deep in certain verticals, including food and beverage with this particular company that I hope to be able to talk to. My target is before Christmas, if not, it should be shortly thereafter.
I'll read another question here. You know, Sean, maybe this is for Sean or Randall, both of you, but, you know, is there any danger or risk on the supply side to meet sales expectations in 2023?
Randall, would you like to take that?
Sure. I think we have to look at, you know, look at two pieces of the business there, I'll speak to security services first. That's a, that's a people-driven business, a major part of that is our airport security contract in Canada. We're hiring effectively there. We're, as Sean said, we're on our target plan right now to roll that contract out. There are inventory components to that contract, but the bulk of it is service related with our labor force. That mitigates some supply risk for inventory management. The other thing I'd point out is, over the last, you know, nine months, 9 to 11 months really, our board actually gave us the directive to mitigate supply chain risks by increasing our raw materials inventory level.
If you look at our balance sheet, you can see we've significantly boosted raw materials over December 31, 2021. That was very intentional and designed to mitigate any risk as we go forward. We're still carrying a reasonable amount of raw materials, particularly critical components for our benchtop NMR that we've gone and sourced to make sure that we have enough on hand given long lead times that we are seeing some customers or some vendors, excuse me. I will say that seems to be easing for our business in the, in the last few months, and we're monitoring that closely, and we're making sure we're not overstocked. There are key pieces that we found throughout 2022 that we had to maintain very close eyes on.
I think we've done a good job of that.
Again, feel free anyone, to. There's a chat function, you can type a question in there or even just, you know, come off mute and ask a question. I wanna make sure this is a, you know, kind of an open floor for anybody. I do have another question.
Yeah.
Oh, Sean, please go ahead.
No, no. Go ahead.
Yeah. Sean, the other one I have is, you know, Sean, will Nanalysis need to raise capital, you know, to finance future growth?
No. We're focused in on making the value we've put in place manifest to shareholders. As you heard Randall talk about during the earnings call that was replayed, we have ample cash, we have potential to get to cash flow positive, and we have ample credit facilities, both in terms of interest-free loans from, you know, unsecured interest-free loans from the Government of Canada, and also a large credit facility through our commercial bank. The plan that both Randall and I have articulated, which is to get the company to cash flow positive middle of next year, that's the plan. You know, I'm not out raising money now or anything like that.
Now, if you mean in the future, like when we decide to resume acquisitions and, you know, you know, buy companies in the human medical imaging part of our business and that sort of thing, yes, of course, our strategy hasn't changed. Acquisitions and raising capital in that context hasn't changed. For the time being in the current context, we do not have any plans to raise capital.
Again, I'll always you know, open the floor for, any more questions here.
Maybe what I'll do is, until you get another question, I'll talk a little bit more about the Swiss acquisition. The company's called Quad Systems. I think many of you know this, but perhaps there's some new investors on the call here that don't.
In March of this year, we announced the acquisition of a company called Quad Systems, which also makes magnetic resonance products, for a different part of the market segment. Our benchtop products have a price range of $40,000-$150,000, and the Quad product line has a price range that sort of goes from about $150,000 up to anywhere to $2 million. It's a higher-end product. Part of the products are a shared technology platform. In fact, that's how we started working with this company was we got a contract to create the electronics and the software for their product. It's the same electronics and software that's in our benchtop product.
There's technology synergies, and it allows us to analyze human blood and urine, as well as, large complicated proteins, you know, that is very important in virology research and so on. We weren't very successful at going after those types of biological applications with our small benchtop products, now we are gonna be able to go after that part of the market with the products from Quad Systems. The company has started to do demonstrations, and started to generate sales. I mentioned during the call that we did about CAD 300,000 in sales in Q3, and we have a, you know, a realistic target. It's not guaranteed yet.
We might end up with some difficulties on the revenue recognition side on December 31st. We have a realistic target of doing CAD 1 million in sales with that company this quarter. We feel like there's tremendous growth potential in 2023 and, of course, 2024. It's the long-term growth opportunity with that company that, which is why we acquired them. That's a little bit of color. I'm headed to Switzerland right now, and I'll be participating in customer demonstrations, with Quad Systems in Zurich and also in France, by the way, where we have a demonstration lab as well. A little more color on that, on that acquisition.
You know, Sean, here's another question. What's your view, and again, I'm happy to give some color here too from the investor relations side, but what's your view on the hit that the share price has taken in the last few months?
Yeah, I'm disappointed in it. You know, I think, I think when the broader market started to go down, I think for a couple of months there our stock price held up pretty well. It did sort of turn over and yeah, I've been disappointed in the stock price. I have to admit that. I know our board also has, you know, not been, you know, enthralled with the stock price. My best sort of estimate of what happened is, there were enough shareholders out there that, number one, kind of got spooked by the broader markets, you know, that they feel like there's gonna be some major, negative event in the broader markets.
They got spooked a little bit on that. Then secondly, I think there was just too many people out there who believed that we had cash flow problems and that we needed to raise money at a lower price, and they decided to sell. I haven't encountered anybody who's admitted that to me, but that's my speculation. I've taken every opportunity to try to communicate to people that, you know, we're staying the course, and we have ample resources to get to cash flow positive, and I think that started to help recently as the broader markets have, has stabilized to some extent.
you know, we still have a lot of longtime shareholders, people that have held our stock as a private company since 2009. you know, most of those people that wanted to sell were able to, you know, in 2020 and 2021 and so on, but there's still some of them and I think a few of them decided to take some chips off the table. There's one more reason. The first company that we acquired, a company called RS2D in France, in March of 2020, a significant part of that was paid in stock, and initially the stock was restricted.
The founder of that company is no longer with us. He's 72 years old, and he retired. Recently a significant amount of that stock has been unrestricted. You know, not that many shares, about 1,500,000 shares, which it's probably all gone now. I believe that he started to sell his stock a few months ago, because the restrictions came off on it. I think that's probably one aspect of it as well.
Yeah. The only last piece that I would add to that is that I do know in the US side that there were some investors harvesting tax losses. If, you know, many investors had gains in early 2022, I've spoken to a few investors who, if you sell here, you can go obviously record the loss, use that for your taxes in 2022. These investors can wait 30 days and come back into the stock. I do know there was a few transactions like that. Any other kinda questions or comments? Feel free again, to type it in the chat or just ask away. Sean, I'm not seeing any other questions here.
Okay.
You know.
Okay.
Yeah.
Go ahead. Sorry. Go, Matt.
Oh, no. We appreciate everybody's support and everybody participating here. I hope this is a good forum for everyone that works out. Sean, if you have any other kinda closing comments.
Yeah. You know, I'm in Europe on a regular basis. I think I just saw many of you people a few months ago, in Belgium. You know, any opportunity I ever have to do that, I look forward to it. Guido, like I say, is on the call. Whenever I have a director that's supporting me on these things, I always like to make sure that I... If Guido, are there any things that you'd like to say? Are there any more questions that you have for me?
No, I think you covered most of it, Sean. I just wanna emphasize that as far as the big CATSA contract is concerned, people have to understand that we have to hire many, many people and have to train these people. This is a very significant investment into future revenue. This revenue will only be, like, maximized maybe in the second quarter of next year or third quarter of next year. The reality is that at this moment, there is a bit of a cash outflow because we have to train people, and we don't get revenue on the other side. Please keep that in mind. I just wanted to make sure everybody understands we have to hire well over 100 people, I think, Sean, if I'm not mistaken.
Yeah. 100, 120, and we're about halfway there.
Mm-hmm. Yeah.
Yep.
So-
Thanks for that, Guido Cloetens. I do want to emphasize to everybody that we are having an excellent fourth quarter. You know, historically, the, our fourth quarter has been our best quarter of the year. And, you know, the visibility I have is that this year will be no different. We're seeing strong sales on the benchtop side. As I mentioned, we'll see strong sales on the, on the Quad Systems side. We will have a significant revenue from this CATSA contract. You know, from my perspective, you know, the business plan that we're executing, you know, is working.
You know, thanks all, to all of you for your support and I look forward to continue having you as partners, as we take this business to where we want it to be.
Sean, we actually did receive another, a question here, if you don't mind. You know, is another contract realistic in 2023, 2024? I'm assuming, this is in reference to maybe the service contracts, but I'll leave it there.
Yes, it is. You know, as I mentioned, previously in this call, we do have some fairly large opportunities in the United States, and we've actually had to put the brakes on those a little bit just because the CATSA contract is, you know, so, sort of all-consuming, between now and March. We will start to work on those opportunities in the United States, soon in 2023. That, yeah, in the timeframe that you mentioned, 2023-2024, absolutely another contract, like, another major contract, is a realistic possibility for sure.
Great.
Okay. Thank you, Sean.
Okay. Thanks, Guido, and thanks to everybody else for getting on the call. It was a pleasure speaking with you today, and I hope you have a wonderful evening in Europe.