Everyone, and thank you for joining Nanalysis's second quarter 2023 conference call. At this time, all lines are in a 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 today, August 24, 2023. I now have the pleasure of handing you over to your host, Matthew Selinger, Investor Relations. Please go ahead.
Thank you, operator, and welcome everyone to Nanalysis Scientific's second quarter 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 risk factors are included in our filings for the year ended December 31, 2022. 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 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 do encourage everyone to review our public filings and press releases, which are posted on the SEDAR filing system, which is www.sedar.com. On the call with me today are Nanalysis founder and CEO, Mr. Sean Krakiwsky, and Nanalysis CFO, Mr. Randall McRae. At this point, with that, I would like to turn the call over to Nanalysis CFO, Randall McRae. Please go ahead.
Thanks, Matthew. It's a pleasure to join and interact with everyone on the call today. I'll first dive into the financial results for the quarter ending on June 30, 2023. All amounts referenced are in Canadian dollars. Financial highlights for the three months ending June 30, 2023 include reporting consolidated revenue of 6.956 million, an increase of 1.769 million, or 34% from the comparative period in 2022. This includes 3.917 million in product sales and 3.039 million in service revenue, predominantly related to security services. Gross profit margins on product sales were 44% for the three months ended June 30, 2023.
This is due to a strong quarter in RS2D, as well as high margins from the third-party equipment sales business within the K'Prime segment. Benchtop NMR margins continued to be depressed in the quarter due to underutilized labor and higher costs related to post-COVID supply chain issues, as well as ongoing inflation. The company has achieved certain increased efficiencies that allowed for the reduction of its manufacturing labor force while remaining aligned with its current manufacturing requirements and improved margins. The company continues to analyze its supply chain to manage its material costs. Service gross profit margins in the quarter were negative 15% as the company continued to accelerate its training schedule for the CATSA project that began in the first quarter of 2023, expensing CAD 920,000 of training costs.
As stated previously, while training will be an ongoing part of the company's security service group, it's not expected to continue at this accelerated pace once the CATSA project ramp-up is complete. While the company now has a presence in all airports, wages related to airports not yet being fully serviced by the company continue to be deferred as prepaid expenses, with the company capitalizing 890,000 of wages during the quarter. We expect gross revenue to continue to increase at a faster pace than expenses, thereby increasing gross profit margins as the project progresses. Loss before other items for the three months ended June 30, 2023, was a loss of 2.399 million versus 947,000 compared to the same period last year.
Net losses for the three-month period ended June 30, 2023, was a loss of 4.054 million, as compared to the three-month loss for June 30, 2022, of 2.532 million. Finally, the company began a cost reduction plan, including layoffs in some of its segments during the second quarter, to better align its resources and reduce its fixed costs. This is expected to generate annualized fixed cost savings in excess of 2 million. The company continues to explore other fixed cost reductions not related to labor reductions, to further increase annualized cost savings. As we mentioned on our last call, the company closed a 4.1 million private placement equity issuance on May 3, after upsizing it from the original 3.5 million, announced on April 21, 2023.
This private placement included insiders and directors. The purpose of this private placement was to bolster the company's balance sheet as we enter the final stages of the CATSA project rollout. Also in the quarter, the company closed on a two-year committed 15 million senior secured credit facilities with ATB Financial, comprised of a 5.0 million demand operating line and a $ 10 million term loan. The new credit facilities replaced the company's previous demand senior secured credit facility with another lender. These new facilities will provide improved financial flexibility and a strengthened balance sheet to help the company manage its operations and current growth initiatives.
The company had cash on hand of $ 5 million, an undrawn available credit facility of 4.7 million, working capital of 11 million, and undrawn government contribution funding of 1.4 million as of June 30, 2022.... I want to take a moment here and address another initiative that we completed subsequent to the end of the quarter. In an effort to counter possible economic slowdowns in both Benchtop NMR and third-party equipment sales, the company has partnered with a third-party financing organization to expand the number of ways its customers can buy products, to include different lease and financing options. Specifically, the lease and finance options will be available to qualified customers within the United States, the company's largest market for scientific equipment.
Related to this, as the company moves away from leasing equipment itself, in August 2023, we successfully closed the sale of the company's U.S. lease-sales lease book for gross proceeds of $518,000. With these additions and changes, we feel we're building a strong financial base that will be the foundation of the company's future growth. With that, I'd like to now turn the call over to our founder and CEO, Sean Krakiwsky.
Thanks very much, Randall. The last time we spoke, we were coming off our first quarter, which fell short of our expectations for overall top-line sales revenue as well as for product sales. This quarter, we are seeing the beginning of a rebound in top-line revenues, thanks to decent MRI revenue and burgeoning strength in security services. We still have a lot of work to do, especially in Benchtop NMR, but we are pleased that the contribution of the diversified business units is beginning to deliver more consistent results for the whole company. I believe that we will see our results and performance continue to manifest growth for the remainder of the year and into 2024. With that, I would like to walk through our different business units. Benchtop NMR.
The company is still working through transition period of integrating the K'Prime and Nanalysis sales organizations for Benchtop NMR and has experienced some sales slowdown due to this. Management continues to believe that the implemented changes will benefit overall long-term sales performance. Additionally, the company is continuing to explore application and value-added distribution deals to augment revenue in the short term and medium terms. Longer term, we are working on several initiatives which, if successful, will result in regulatory tailwinds for our Benchtop NMR products. The company believes that there may be a temporary slowdown in capital spending due to economic weakness in the U.S. and worldwide, which it continues to monitor closely. Over the last quarter, we rationalized our manufacturing by reducing headcount, but are confident that we are nimble enough to be able to ramp up with increased sales as they come.
In terms of products and technology, we continue to innovate, and in particular, are applying the 100 MHz advances to our 60 MHz offering. Because of the tremendous R&D progress made on the 100 MHz over the last year, we have been able to reduce the size of our R&D group while maintaining a culture of innovation. This is consistent with our commitment to exit 2023 cash flow positive on a run rate basis in Benchtop NMR and indeed in all of our business units. Regarding third-party equipment sales, 2023 has started out slower than what was experienced in 2022, both because of focusing on the CATSA project and cautious CapEx spending environment in verticals such as the chemical industry.
There continues to be macro-level concerns in many analytical markets over the last couple of quarters, and some are predicting it can last a few more quarters, depending on the market segments. As Randall noted above, due to the current market conditions, we have partnered with a company to provide financing solutions to our customers so that we can potentially pull funds, funds from operating budgets instead of capital equipment budgets. These two funds are allocated differently within organizations in our industry. This will provide our team with another talking point with our customers to provide a solution to obtain our products. We think this could help sales in an uncertain environment, where there may be some hesitation due to potential real or perceived economic headwinds.
We expect the second half of 2023 to be consistent with the first half, but we are working on a few larger deals that, if landed, would improve results toward the end of this year. Regarding Quad Systems and high-field NMR, as we mentioned on our last call, on April eighteenth, the company launched the full 400 MHz high-field NMR product in collaboration with Quad Systems, of which the company owns 43%, at the prestigious Experimental NMR Conference in Monterey, California. There are currently two demonstration labs set up by our partnership, one in Strasbourg and one in Zurich, Switzerland, where a full system, including superconducting magnet and our console, which we manufacture for Quad, is working successfully. We are currently in the planning stages of establishing more demo labs in locations such as the U.K., USA, and Calgary at our headquarters.
Together with Quad Systems, we are focused on democratizing NMR, and we're enthusiastic about this new product family. Regarding our MRI sales, we were able to recognize revenue from a large project that our subsidiary in France, RS2D, began work on during the first quarter and continued into the second quarter and indeed will continue on into the third quarter. We will continue to see MRI and medical imaging projects like this from time to time as this business unit grows. We also continue to ship our MRI console to customers in the U.K. and China, working on next-generation MRI technologies and approaches. Regarding security services, the CATSA Security Services contract continues its ramp-up phase. We are now fully staffed and in all 81 airport locations in Canada and are expanding our services offered in each location.
The company expects this project to start generating positive cash flows by the end of this year on a run rate basis and full service rollout to be completed in early 2024, where there is a contractual requirement that the incumbent service provider is fully transitioned out by March 31st, 2024. As we have noted previously, this contract is going to be profitable for us, give us a stepped up annual revenue base, and will provide us with a large service organization that we will need and be able to leverage going forward. Keep in mind that while this is initially a five-year contract, after the first phase-in year, it can be renewed for an additional two 5-year terms. Additionally, we continue to get referrals for additional contracts like this from our customer and from other partners.
We do foresee that with a fully trained workforce, there will be the opportunity to leverage them and service additional projects. Regarding our overall business, while we still have a lot more work to do to get the business firing all, on all cylinders, we're already seeing the benefits of a fully diversified company. This strategy was born years ago when we went public in June of 2019, and it entailed an aggressive acquisition strategy. We did what we said we were going to do, but the digestion and integration was more difficult than anticipated, especially because of the CATSA contract win. Admittedly, some parts of our business have suffered temporarily because of this strategy. However, we are starting to see green shoots, and we expect to see clear results by the end of this year.
I expect that at the beginning of 2024, we will be positioned for prosperity with all of our business units operating synergistically. In closing, we have done a lot of work and made a lot of tough, tough decisions thus far in 2023. I would like to thank our team here at Nanalysis for putting in all their hard work as we become a fully vertically integrated global scientific instrumentation company. Through the tremendous efforts of our over 200 employees, we serve customers in the security, pharma, biotech, food, energy, advanced materials, petrochemical, healthcare, and education markets with imaging and detection products and services. I would also like to thank our other stakeholders, especially our investors. On that note, I would like to remind all shareholders that this Friday, we are holding our annual investor barbecue at our facility in Calgary.
Please drop by to enjoy some food prepared by two of our master chefs employees, and talk to the broader Nanalysis team about our exciting future together. Food and drink served starting at 12:30 P.M. Hope to see you there. With that, I would like to turn it back over to the operator for questions.
Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star followed by the number one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press star two. One moment, please, for your first question. Your first question comes from the line of Stefan Quenneville from Echelon Capital Markets. Your line is now open.
Hi, guys. Congrats on the quarter. Nice, nice bounce back, and nice sort of numbers out of, out of the CATSA contract, better than, than I was expecting. Could I ask just a couple questions on the cost reductions in the NMR business, it sounds like primarily? Is that two million, you know, where is that coming from? Like, which part? You mentioned some cuts in R&D, some cuts in manufacturing. How many people does that represent, and are there other things that you've trimmed back on?
Hey, Stefan, Randall here. Thanks for the question. So looking at the NMR business, so Nanalysis and our RS2D segments both are the ones that we're focusing on at the moment. And we started, as we said in our MD&A, we focused on our manufacturing, as we had some excess capacity there. And then we had efficiencies gained in later 2022 that basically allowed us to have excess capacity. And then product development or R&D as well. Again, we hit some milestones last year, so we had the ability to refocus our group on the key initiatives we needed and made the decision to reduce headcount there as well.
In addition to that, we're really focused everywhere on gaining efficiency. You know, we're looking at our kind of G&A lines as well going forward.
Okay, great. And just on the CATSA, you're not fully staffed there yet, according to the press release. How many more people do you need to add for that to happen?
That's a really good question. So it's a two-part answer. The first being, you know, we're about four away from our initial estimates, but we made the decision to increase our staffing levels, our expected staffing, from 120 to just over 130. And the reason we did that is because we have, in addition to the on-call coverage we're doing, we've got remote locations to cover. And as we've gone through the project, we don't want to burn our team out by dealing with both those aspects, particularly, with the travel in and travel out into more remote locations. So we made the decision to up that to a little bit over 130.
So I think we've got about 15 spots left to fill between a handful of spots on the original allotment and then our extra, say, 10 that we wanted to add on top.
Okay. Is that going to change your expectations for training costs? You know, my sort of expectations are that training costs are going to remain elevated this quarter, Q3, and then it should kind of drop off meaningfully. Is that a reasonable way of thinking about that?
... I would expect it to go into Q4 a little bit as well, but, that's because we are expecting them to drop off. But it depends on when the courses were scheduled. So we're, we're expecting right now to still be training, you know, larger amounts of people into Q4. Now, having said that, we've gone through significant amounts of the training already, so I already, already am expecting that to come down. And as far as what, how much it'll increase it, you know, we're adding less than 10% to the total allotment, so it'll be certainly less than 10% additional training. And it also depends on, where those individuals are being tasked, because not every location has the same training needs, depending on the equipment they have.
Okay, fair enough. And then just finally on the contract, you know, the phase out of the previous sort of service contract provider is March 31st. If you guys aren't up and running in all the locations that the service level expected, do you guys face penalties of any sort? What's the sort of dynamic there?
No, I don't believe so. We're, you know, we're working well with the customer right now, and there is... And not only the customer, it's important to understand, too, that the incumbent is working very closely with us. So as a group of three, we're working to make this seamless for the customer, as well. And so I think given where we're at today, in terms of hiring and training, I don't think that March 31 is not a date that I'm particularly concerned about at this stage.
Okay. Then just finally, could you just characterize the dynamic with the customer? You know, they're happy so far. I mean, you're obviously doing a lot. Transitions are always a bit bumpy. Are there any pain points, any issues flaring up?
I mean, there's always going to be challenges when you're undertaking a project of this size. But overall, the customer has been quite happy with us, both on our operational side and frankly on our administrative side as well, which is not insignificant in terms of you know managing information that flows to the customer.
So yeah, it's been a really good relationship and, you know, without getting into specific stories, we've had, you know, great feedback coming in from both the head office of the customer, as well as some really good individual accolades and compliments coming from the the, like, airport-level teams about the work that our teams are doing, the care our teams have in terms of taking care of the customers and the, you know, in many cases, the extra mile that our guys are going to to service the customer and take care of them well. So I'm really happy so far with that.
Okay. And then let's maybe dig a bit into the benchtop NMR business. You know, I understand it's a you know, challenging macro environment. I mean, you know, Thermo Fisher you know, they missed their numbers for the first time, I... and I don't know how long last quarter. So you know, you're not alone. Even the real big players in the space are facing some economic challenges. Like, you know, can you-- I know it's going to be, it's hard to do, right? Because you're a small company trying to sell these instruments.
You know, how much of the slowdown there is, has to do with the sales force reorg and how much is really, you know, just, you know, base market demand slowing down, people being slower to issue purchase orders and that sort of thing? Maybe help me wrap my arms around that a bit.
Thanks, Stefan. This is Sean. Yeah, it's a combination of both. And the way I like to think of it is that, you know, we, I'm being somewhat facetious here, so please filter my point. But we stumbled at the wrong time, right? We had a stumble because of the CATSA contract and the K'Prime coinciding, you know, the same couple of months, right? And that's right when we started to see weakness in CapEx equipment. So, but I-- so, you know, if you want me to sort of say 50/50 or something like that, or 60/40, one way or the other, I guess I'd be happy to. But mostly, to be honest, I'm just focused in on the solution.
And we made some very difficult decisions with regards to our sales organization and that we knew when we made them, you know, was going to hurt a little bit. But I feel like we're on the other side of that now. And like I said in the previous part of this call, I'm seeing green shoots, and I think you're going to see the fruit of this activity in Q3 and Q4 of this year.
Okay. And I'll ask my last one, because I, I'm sorry to be dominating the call here. But, just on, on Quad Systems, when do you guys think that you're going to start seeing some, you know, relatively meaningful revenue from, from Quad Systems? And what, what's it going to take for that to happen?
Yeah. So we've started to give demonstrations of our full high-field NMR product offering. I do expect to generate purchase orders this year. I'm not really going to comment on sort of the revenue recognition aspect of that. But I do expect to be generating some material momentum this year in terms of purchase orders. Randall, do you have anything to add to that?
Yeah, it's a great question, and it leads to something that we discussed in the financial statements I think is worth mentioning now as well. In our subsequent events, we note that we didn't exercise our option to acquire the remaining portion of Quad on July first. So what that's going to mean is we will no longer be consolidating Quad's results into our numbers. We'll be treating them... Without getting into all the nitty-gritty of the accounting details, right now, their revenue is part of our revenue, and we eliminate the intercompany amounts. Going forward, we won't be including their revenue anymore or their assets into our numbers. So that's going to be a pretty substantial change to the presentation of our statements here in the third quarter, and something to bear in mind.
Okay, great. We'll take care of that offline. That's it for me, guys. Thanks.
Thanks, Stefan.
As a reminder, if you have a question, please press star, followed byone . There are no further questions at this time. I will now hand over the call to Sean Krakiwsky, Nanalysis's CEO. Please continue.
Thank you very much. It's been a pleasure speaking with everybody on this call, and I look forward to the next opportunity, whether it's on more of a general forum like this or one-on-one meetings. So please, give me a call anytime you'd like to chat. And again, hope to see many of you at our investor barbecue tomorrow in Calgary at 12:30 P.M. for a wonderful lunch. Have a wonderful evening and look forward to next time. Bye-bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.