Mr. Sean Krakiwsky reports

NANALYSIS REPORTS SECOND QUARTER 2023 RESULTS

Nanalysis Scientific Corp. has released its second quarter results ending June 30, 2023. Chief executive officer Sean Krakiwsky and chief financial officer Randall McRae will host a conference call at 5 p.m. Eastern Time today to discuss the results.

"Our top-line results of $6,956,000 in sales is encouraging on a sequential and year-over-year basis," said Sean Krakiwsky, founder and chief executive officer of Nanalysis. "The main contributing driver was continued strength in security services with rollout of the CATSA airport security project, as well as solid results at RS2D and in third party equipment sales. Our core benchtop business is not yet where we would like it to be, and we continue to work on both sales and manufacturing refinements. We have made large strides in the quarter that we believe will pay off in the coming quarters and next year. We are seeing that our strategy towards a full-service scientific instrumentation company with different business units is beginning to pay off," stated Mr. Krakiwsky.

Financial and operational highlights (1)

Financial highlights for the three months ended June 30, 2023:

• For the three months ended June 30, 2023, the company reported consolidated revenue of $6,956,000, an increase of $1,769,000 or 34 per cent from the comparative period in 2022. This includes $3,917,000 in product sales and $3,039,000 of service revenue, predominantly related to security services.
• Gross profit margins on product sales were 44 per cent for the three months ended June 30, 2023. This is due to a strong quarter in RS2D as well as high margins from third party equipment sales within the K'(Prime) Technologies Inc. (K'Prime) segment. Benchtop NMR (nuclear magnetic resonance) margins continue to be compressed in the quarter due to unutilized labour and higher costs related to post-COVID-19 supply chain issues, as well as continuing inflation. At the end of June, 2023, and into the third quarter, the company took cost-cutting measures, including the reduction of its manufacturing labour force to better align with its current manufacturing requirements and improve margins. The company continues to analyze its supply chain to manage its material costs.
• Service gross profit margins in the quarter were negative 15 per cent as the company continued its accelerated training schedule for the CATSA project that began in the first quarter of 2023, expensing $920,000 of training costs. As stated previously, while training will be a continuing part of the company's security service group, it is 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 continued to be deferred as prepaid expenses, with the company capitalizing $890,000 of wages during the quarter.
• Loss before other items for the three months ended June 30, 2023, was $2,399,000, versus $947,000 compared with the same period last year.
• Net loss for the three-month period ended June 30, 2023, was $4,054,000, as compared with the three-month loss for June 30, 2022, of $2,532,000.
• During the quarter, the company began a cost reduction plan, including layoffs, in some of its segments 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 labour reductions, to further increase annualized cost savings. In conjunction with this initiative, the company recognized restructuring expenses of $355,000 in the quarter.
• The company closed on two-year committed $15-million senior secured credit facilities with ATB Financial, comprising 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.
• The company closed a $4.1-million private placement equity issuance on May 3. This private placement included insiders and directors.
• The company had cash on hand of $5.0-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, 2023.

(1) Financial highlights should be read in conjunction with the company's Q2 2023 management's discussion and analysis, as well as the Q2 2023 interim condensed consolidated financial statements.

Recent strategic and operational highlights during and after the second quarter of 2023 include:

• Benchtop NMR: The company is still working through the 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 long-term sales performance. Additionally, the company is continuing to pursue partnerships and while label opportunities to augment revenue from direct sales. The company believes it has experienced a cyclical slowdown in capital spending due to economic slowdown in the United States and worldwide, which it continues to monitor closely.
• Security service: The airport security project continues its ramp-up phase. The company now has a presence in all 81 airport locations and is expanding its services offered in each location. The company expects this project to begin generating positive cash flows in the second half of 2023 and full-service rollout to be completed in early 2024.
• Quad Systems AG: As previously mentioned, on April 18, the company debuted and presented the full-400-megahertz, full-high-field NMR product in collaboration with Quad Systems, of which the company owns 43 per cent, at the prestigious ENC 2023 conference. The company expects Quad's component sales to gain momentum in the second half of 2023, including initial full system sales in 2024.
• MRI (magnetic resonance imaging): The company was able to recognize revenues from a large preclinical MRI project that started during the first quarter, which contributed to a solid quarter at RS2D.
• Third party equipment: Second quarter sales grew 52 per cent over Q1 2023, though still trailed behind Q2 2022 sales. To counter possible economic slowdowns in both Benchtop NMR and third party equipment sales, the company has partnered with a third party financing organization in the United States to expand the number of ways its customers can buy products to include different lease and financing options.
• Sales leases: In August, 2023, the company successfully closed the sale of its U.S. sales lease book for gross proceeds of $518,000 (U.S.).

Operating results

For the six months ended June 30, 2023, the company reported consolidated revenues of $11.63-million, an increase of $889,000 from the comparative period in 2022. The increase is mainly attributable to increased service revenues. K'Prime third party product sales were down $688,000 year over year as a result of softness in the scientific equipment market, particularly in its U.S. regions. The Nanalysis segment accounted for $2,224,000 of the drop as a result both of downward market pressure and continuing effects from the significant turnover in its Benchtop NMR sales organization. This significantly impacted the capacity of the company to generate new sales leads in mid-2022. During the remainder of 2022, the company rebuilt its sales organization and began training new representatives, as well as bringing on third party, commission-only sales contractors. Q1 2023 experienced a significant drop in sales as a result of the echo effect of the lack of lead generation capability in mid-2022. Sales levels stabilized in Q2 2023 and, as a result of investment in rebuilding the sales team, the company is confident that it has restored its lead generation pipeline, and that, as a result, we will see sales begin to ramp up the remainder of the year and into next.

Gross profit for the six months ended June 30, 2023, was $1,616,000 (a margin of 14 per cent), compared with gross profit of $6,577,000 (a margin of 61 per cent) for the six months ended June 30, 2022.

The company's net loss for the six months ended was $8,374,000, as compared with the six-month loss for June 30, 2022, of $4,024,000. The increase in net loss was driven by lower margins in the first half (H1) of 2023, losses in the security services business as a result of one-time bulk training and other non-deferrable costs related to the ramp-up of the Airport security project, and, to a lesser degree, higher G&A (general and administrative) costs also primarily related to the airport security project as well as at Quad. In addition, the company has recognized $355,000 of restructuring costs in Q2 2023. This represents costs related to anticipated head count reductions that will take place over the rest of 2023, primarily during the third quarter.

Comments and outlook

"We are very encouraged by the continued rollout of the airport security project that has been meeting our projections in 2023," said Sean Krakiwsky, founder and chief executive officer of Nanalysis. "We are nearly fully staffed and are in all 81 of the airports we cover. During the fall, we expect to expand services in many of these airports and thereby achieve positive cash flows from the project. This will be followed by expanding to offer 100 per cent of our services in all remaining airports by early 2024.

"Adding high-field NMR product offerings through our collaboration with Quad Systems and their recent product launch gives us an expanded product line and moves us into an additional large market," continued Mr. Krakiwsky.

"With the changes implemented on right-sizing our R&D and manufacturing capacity, particularly as it relates to Benchtop NMR, we believe we are poised to return to growth alignment in 2024. We continue to hold our place as a leader in Benchtop NMR and plan to retain that position through continued innovation and cross-pollination of technologies used in our product lines," concluded Mr. Krakiwsky.

Conference call

Investors interested in participating in the live full-year call can dial 1-888-664-6392 or 416-764-8659 from abroad. Investors can also access the call on-line through a listen-only webcast.

The webcast will be archived on the company's investor relations website for at least 90 days and a telephonic playback will be available for seven days after the conference call by calling 1-888-390-0541 or 416-764-8677, conference ID No. 309928.

Additionally, the company will be hosting a question-and-answer session for its European investors that is at 8:30 a.m. ET tomorrow, Friday, Aug. 25, which can be accessed on-line or at 1-437-703-4522, phone conference ID No. 899910303 followed by the pound key.

About Nanalysis Scientific Corp.

Nanalysis's business is what the company terms MRI and NMR for industry. The company develops and manufactures portable NMR spectrometers or analyzers for laboratory and industrial markets. The NMReady-60 was the first full-feature portable NMR spectrometer in a single compact enclosure requiring no liquid helium or any other cryogens. The company has followed up that initial offering with new products and continues to have a strong innovation pipeline. In 2020, Nanalysis announced the launch of its 100-megahertz device, the most powerful and most advanced compact NMR device ever brought to market.

Nanalysis's devices are used in many industries (oil and gas, chemical, mining, pharma, biotech, flavour and fragrances, agrochemicals, law enforcement, and more), as well as numerous government and university research labs around the world. The company continues to exploit new global market opportunities independently and with partners.

In 2022, the company acquired K'Prime, a North American sales and service company that provides sales services for scientific instrumentation for pharma, food, chemical, and oil and gas customers, as well as imaging systems for security applications. K'Prime's service organization provides airport and commercial security installation and maintenance solutions across North America.

Additionally in 2022, the company acquired a 43-per-cent ownership in Quad Systems, a Zurich-based NMR company focused on high-field NMR for pharmaceutical and other vertical markets.

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