Nanalysis Scientific Corp. (NSCI) Earnings Call Transcript

Good morning, everyone. Welcome, and thank you for joining Nanalysis Scientific Corp.'s Q2 2026 Earnings Call. I'm Jake Bouma, an IR consultant for Nanalysis. Today on the line discussing Nanalysis' Q2 2026 financial results and company highlights are the company's President, CEO and Founder, Sean Krakiwsky; and CFO, Heather Kury. Following their remarks, we will open up the call for an analyst Q&A session. Before handling over the call to Sean and Heather, please note that information we present today could contain forward-looking information that is based on management's expectations, estimates and projections. Please consider the risk factors, including those in the filings made by Nanalysis on SEDAR when reviewing this information. Also, all amounts discussed will be in Canadian dollars unless otherwise noted. With that, I'd like to turn the call over to Nanalysis' CFO, Heather Kury.

Thank you, Jake, and thank you to everyone joining us on the call today for taking the time out of your day to allow us to share with you the progress we are making here at Nanalysis. I will begin by walking through the financial results for the second quarter, which ended June 30, 2026. All amounts referenced are in Canadian dollars. For the 3 months ended June 30, 2026, the company reported consolidated revenue of $9,722,000, an increase of $146,000 or 1.5% over the corresponding period in 2025. Product revenue declined year-over-year due to the termination of third-party equipment sales while security services revenue increased year-over-year, primarily due to increased levels of project-related work associated with the airport security maintenance business. Gross margin percentage for product sales for the 3 months ended June 30, 2026, was 65% compared to 61% in the corresponding period from 2025. The improvement in the second quarter was primarily attributable to operational improvements. Gross margin percentage for security services for the 3 months ended June 30, 2026, was 12% compared to 10% in the corresponding period from 2025. The improvement was driven by operational efficiencies, including enhanced logistics processes, more effective management of overtime and on-call hours as well as higher levels of project-related service activity. The company recorded adjusted EBITDA of $881,000 for the 3 months ended June 30, 2026, an improvement of $1,343,000 compared to the corresponding period in 2025. The improvement was primarily attributable to improved operational performance, which included increased security services customer service, lower sales, marketing, general and administrative expenses and included ensuring that all eligible investment tax credits have been filed. Net loss was $666,000 for the 3 months ended June 30, 2026, an improvement of $1,456,000 compared to the corresponding period in 2025. The reduction in net loss reflects improved business performance. With that, I'll turn the call over to our Founder and CEO, Sean Krakiwsky. Sean?

Thanks very much, Heather and Jake. We're quite proud of our accomplishments in the second quarter. As you can see, our adjusted EBITDA number, which is kind of a proxy for cash generation that we use, which is important to our bank and also our internal management team and our Board has gone up substantially, and we're working very hard to keep our company going in the direction of improving that number over time. With regards to the business operations of our company, we have seen some modest improvement in services business gross margins year-over-year. But really, we haven't seen what I consider the sort of important part of the improvements associated with the great work that Marc Tomlinson has done. And I expect to see several emblematic criteria of how that business is going in a great direction going forward. So keep a look out for those types of things. With regards to our core technology products, our Benchtop NMR spectrometers, we've worked very hard to improve the management of our international dealer network in territories like Japan and U.K. and India and China and Indonesia, and we see a lot of good things there. Substantial reorganization of how that international dealer network is managed and the focus we put on it. We're already seeing the fruits of that. With regards to the direct sales organization for our Benchtop NMR spectrometers, we've totally revamped it and in light of some of the acquisition-related activity of the past that didn't work out so well, but our organic efforts are, in fact, looking very promising, and we expect to see the fruit of that basically over the next coming months. I've already seen it in the numbers thus far, and we expect to see strength of that going forward, which, of course, is coupled with ongoing innovation of our products. And our products have had -- have better performance than they ever had before. And we're really excited about the ongoing performance of our products and new products that we'll be launching that expand the market for us. And just as a side with regards to our financial statements, how you view innovation there. Don't you look at the income statement and the number for R&D there, you have to look at the notes, and you'll see that we continue to spend a substantial amount on technology innovation, and we'll continue to do that. It's just that we receive a tremendous amount of cost recovery monies from various governments, both in Canada and France that nets off against the gross R&D spend. So don't be fooled by that small number you see on the income statement. If you want, contact me or look at the notes and you'll see, we still spend a healthy amount on innovation, and we always will. We're just very fortunate to be able to get subsidies for that R&D activity. So as I've mentioned many times in the past, there's a tight correlation between our core technology products, namely Benchtop NMR spectrometers and some of the other things we do in our technology business, namely MRI and high-field NMR activity, which we do through partnerships as QUAD Systems in Switzerland and also companies like IMRIS, which is a private equity-backed, MRI -- clinical MRI company in the United States, which we work very closely with and very proud of the activity that's going on in those areas. And we're working very hard on some really cool licensing opportunities and recurring revenue opportunities with those customers going forward. Just to touch on some macro issues. So as an example, one of our new directors on our Board, Dr. Werner Maas, a very well-known figure in the NMR industry, in fact, was the President of Bruker Biospin for many, many years and was an employee of Bruker for roughly 20 years, and he saw that company go from relatively small revenue to $1 billion in revenue overall. So quite a knowledgeable person when it comes to NMR and scientific instrumentation and analytical instrumentation and so on. And one of the things that he's been emphasizing recently, which we are seeing in the numbers is that pretty much all instrumentation companies had kind of a weak sort of first half of the year, but everybody is expecting quite a bit of improvement in the second half of the year. So we're seeing that as well in addition to the normal seasonality that we have, which usually bodes well for Q4, but now it's sort of the sort of macro event that's related to some of the budgetary stallings that occurred in the United States at the beginning of the year and the uncertainty which didn't just affect the United States, but also had ripple effects all around the world. So we're seeing that in our sales pipeline in months like July and August, where in previous years, we'd essentially just tell our salespeople, hey, get your vacations in July and August. We're not saying that this year, and we're seeing a lot of exciting opportunities. So we expect to see continued progress overall with our business and with the new cost structure that we put in place in our company that that our CFO has ensured that we were positioned for really good profitability going forward as our revenue increases. So really excited about all the hard work we've done and how we're positioned for significant improvement in our financial performance going forward. So with that, I'd like to turn the meeting back over to Jake and see if there's any questions anybody in the audience today. And thanks very much for joining us, by the way.

Thanks, Sean. [Operator Instructions]

I see a lot of familiar faces on the call. I see Walter in Belgium, and I see all kinds of people that are -- I know are familiar with the company. I see Doug and probably in Muskoka. So I'll try to maybe get the juices flowing a little bit. So -- yes, maybe I'll just touch on the last part of my talk and talk about how probably several of you were expecting some -- maybe some more explosive growth in Q2. And we almost sort of saw some of that, but ultimately kind of didn't get things rolling before the revenue recognition cutoff of June 30. But again, it's related to this theme that second half of the year is looking totally different than the first half of the year. And again, this is substantially because of macro issues. So we do expect to see significantly better numbers in the second half of the year, starting off in Q3 and so on. So if you remember -- I don't know if any of you remember this, but if you remember what our Q4 numbers were in 2024, I know that's going back a little ways, but essentially, it's before we started to terminate some of our third-party businesses, which were related to acquisitions, and we kind of went organic. And they were also before a lot of the uncertainty that was created by the new U.S. administration sort of in Q1 of 2025, right? So if you can all harken back to the Q4 2024 time frame, which, of course, preceded our current CFO. But if you remember the adjusted EBITDA numbers and the operating cash flow numbers that we did then with the revenue that we were able to do in that quarter, you can -- that kind of foreshadows what our potential is, right? Now the reason why we weren't able to keep that potential is because we had to shed some businesses because of our legacy issues associated with acquisitions and then the macro uncertainty came in with the Trump tariffs and so on and so forth. But I think it really is emblematic of anybody who wants to sort of see, in the form of financial numbers, what our potential is, you can look at that quarter and not only do I expect to get back to those kind of revenue numbers, but we have a way better cost structure in place. And then most importantly, everything we're doing now is organic. And so we have full control of our destiny and how we resume growth. So that's just sort of an interesting thing to look at if you have some time on your hands and you want to say, like, what could this company do going forward if it achieved x number of revenue in a quarter and so on now that they have even a better cost structure in place. So not sure if that is going to get anybody to put up their hand, but those are the types of things that I think about every day, and we're working on every day in our business. Okay. I see Walter with sort of a half smile on his face. So a little bit of a laugh. So Walter, you're on mute if you're trying to say something.

Is this -- do you hear me?

Yes, we do now, Walter.