EXtract from a report which I write to my Belgian and Dutch friends on my startup investments ( computertranslated from Dutch)
NANALYSIS ( TU QUOQUE FILI MI)
This famous statement in history applies here as well. I did not expect that we also had to wait a bit longer for positive results at Nanalysis. Hence probably the increasingly lower share prices over the last few months.
Those who wondered how a company that only 2 years ago had a turnover of CAD 8 million per year and then suddenly won a government contract (CATSA) of CAD 160 million over the next 5 years (with a chance of extension) could be doing so poorly on the stock market at the moment were given the answer on Thursday evening's cc and Friday afternoon's cc as well. The CATSA contract was delayed and had also weighed on the other business segments . Recruiting and training over 100 people in a very short period of time turned out to be a little more intense than planned . CEO Sean admitted that he had underestimated the situation.
The positive news is that the contract is now up and running and the government is very pleased with the service Nanalysis is providing. At the moment, they have started in 39 of the 80 airports in Canada...The roll-in period is now mostly over and it is expected that revenues will increase each quarter as more airports are served. The roll-in period for each airport has also been greatly reduced by the experience gained.
Without the Catsa contract, Nanalysis probably would already have shown positive results this last quarter. However, the Catsa contract suddenly crossed their way and then a decison had tob e made do we do it or don't we do it?.
It had long been a goal to establish a major service arm in Nanalysis so this was the time . With the Catsca contract renewable after 5 years, Nanalysis is going to have a stable cash inflow in the coming years and they could notjust miss that opportunity.. Moreover, this contract is a catalyst for other service contracts with public companies in other countries.
The total direct walk-in cost for the Catsa contract was estimated at a CAD 3.8 million . I would have preferred those to be capitalized on the balance sheet and be amortized over the life of the Catsa contract but that appears to be against international accounting rules. Still, that would have seemed more logical to me.
Nanalysis also had to deal with staff turnover in the sales department this year when they wanted to change the compensation of salespeople where now salespeople are rewarded more based on their successes. Some former salespeople who didn’t accept that change left the company and that of course affected sales. This problem is now behind us.
Also the launch of the 100 MGHZ devices gave some run-in problems where the first shipments were recalled and repaired which meant a cost of 260K cad. This has also been resolved.
The reduction in the gross margin is a resultof a mix of all these start up - problems but also because some sales by Kprime of third-party products yield only a commission and not sales revenue. After the run-in period, that gross margin will go back toward 60+ percent.
In the second half of this year, Nanalysis should become clearly cash flow positive.
For this reason, the price target for Nanalysis in the Echelon report is not unreasonable. Nanalysis Scientific is undervalued, says Echelon - Cantech Letter
