Nanalysis 2021 Q4 Conference Call Notes and My Commentary

A fresh off the grill take on the call

The Numbers

The whole year of 2021 vs 2020 was at about 100% revenue growth from $8M CAD in 2020 to $16M CAD in 2021. For the quarter the results went from $2.7M CAD in 2020 to $5.1M CAD in 2021.

I think the results were solid. We all wanted more from 100 mhz revenue in 2021, but it didn’t happen, so water under the bridge it shall be.

Takeaways

Sales of 60 mhz and 100 mhz machines not going to level out or slow down, and they will aggressively attempt to enter new markets. Nanalysis will pause mergers and acquisitions for the time being to digest recent acquisitions. They expect acquisitions to continue in 2023 as they get closer to entering the healthcare MRI space. In five years they think they will have more software people than hardware people, it is that important to their long term strategy.

Enthusiastic about the service contracts that K-Prime will enable the combined company to bid on.

Been working with Quad Systems since 2020 on their high field solutions. It works well to analyze human blood and urine. Price of solutions from Quad Systems will be $500K to $2000K. Nanalysis has had 10 people embedded with Quad Systems for a year. They are beginning to sell modules recently.

Questions

Accounting treatment of Quad Systems?

Still working with auditors and not 100% sure what it will be.

Manufacturing of 100 mhz, what is the lead time being ordering and shipping?

Still in 2–3 month range, working to reduce it to 2–3 weeks, which is the objective. By mid-year they should be at the 2–3 week target.

Gross margins of 61%, is inflation hurting gross margin?

K-Prime and Quad Systems will impact gross margins. For the core products gross margins will continue at 61% while they work through the backlog. Once the backlog is gone gross margins will go up on the core products because they can raise prices on new units sold.

Direct Sales?

Through K-Prime they are expanding direct sales to other countries over time beyond the United States and Canada. Sometimes they will lead with service and sometimes they will lead with sales to expand footprint. They have resumed physical conferences where they can demo the product live and just had one in Orlando. They were a great source of leads for the pipeline before the pandemic. The pipeline is strong, but has mostly been coming from digital advertising.

Color on Q1?

Trajectory of 100% YoY growth for 2022 continues and Q1 doesn’t change that. Q1 was a solid quarter, but they will hold off further details until the Q1 conference call.

Asian Market Strength in Q4?

Just ebb and flow. Surprising strength not because of any one factor. They would like to be more active internationally long term. The person they brought in to manage international sales is doing really well after 1–2 years working on building it.

Have Acquisitions Caused Turnover of Employees?

No. This is a core strength of Nanalysis, retaining employees overall and from acquisitions.

Vertical Partnership Updates?

All alive and relationships are strong. Pandemic dampened activity. Recovering from that still. No material items to mention. Still focused in on this in an important way.

Backlog of 100 Mhz?

$700k of pre-payments on 100 mhz. Strong backlog still for the next few months. Goal of 100 mhz capacity is 10 units per month.

K-Prime Breakout of Revenue Categories?

Will it be its own segment? Or will they break it down by leasing, service, etc… Still deciding, but leaning towards highlighting certain components at least in MD&A if not on the financials.

Leasing?

Mostly sales leases where they recognize the revenue up front, and they can offer that on the 100 mhz, though most of those customers can pay up front.

Sectors that are Strong?

Strength in pharma and university research. K-Prime is adding strength in security market (border crossings, prisons, airports, detention centers).

Order Size?

Seeing transition to getting some 3–5 unit orders instead of 1–2 units and hoping vertical opportunities will create very large orders in the future.

Ramp-up of 100 Mhz Production?

Why not at 10 units per month already? Trade-offs when balancing that manufacturing of 100 mhz with that of other products. So manpower(?)

Uplisting to TSX?

Won’t happen by the end of 2022. Actively in discussion about it at management and board levels. It is their plan to be on a major exchange. Good chance it will happen in 2023. It will help bring liquidity and institutional investors. They will focus on it more strongly when they feel they really need it. Right now they are focused on bringing value to the stock price by executing. Being on the TSXV is making acquisitions easier because the paperwork burden is less.

Uplisting Requirements Met?

Yes they have met the requirements.

My Commentary

I see the 100 mhz revenue being “artificially strong” in Q1 and Q2 as they will likely produce more 100 mhz units than they sell in those quarters. If the K-Prime revenue of $8M-$10M CAD is part of their $32M CAD target for 2022, then that only has them adding $6M-$8M of higher margin hardware revenue. That is a 40% to 50% increase, and will include some revenue from Quad Systems. That should be a slam dunk IMO.

In a $32M revenue scenario for 2022 I’m not sure exactly what to expect from the share price. I would probably go for 6X high margin revenue, so maybe $1.30 to $1.50 a share. You could easily justify a 12x revenue valuation when you start looking at comparative companies, but that is not something you can necessarily count on as an investor. It is just gravy on top.

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Lindsay Leeds

I am an IT guy by trade, with interests in investing and personal finance.