Nanalysis Scientific : Research Note

					July 26, 2021
					Marco Rodriguez, CFA
					[e-mail]
					214-987-4121
MARKET STATISTICS			COMPANY DESCRIPTION
Exchange / Symbol		TSX.V: NSCI
Price (CAD):			$1.37	Nanalysis Scientific Corp., develops, manufactures, and sells compact nuclear magnetic
Market Cap (CAD, mm):		$92.2	resonance (NMR) spectrometers and magnetic resonance imaging (MRI) equipment. The
	Company has a 10-year history as a global developer and supplier of portable nuclear
Enterprise Value (CAD, mm):		$92.2
	magnetic resonance spectrometers for the industrial instrumentation market. Its
Shares Outstanding (mm):		66.7	products enhance analytical capabilities in quality control, research, teachings, and
Float (%):				94.1%	industrial environments through increasing availability of high-resolution NMR testing
Volume (3-month avg.):		150,547	at fractional pricing in portable benchtop tools. The Company sells its products globally
52-week Range (CAD):	$0.38-$1.50	and is headquartered in Calgary, Canada. Furthermore, management notes that 30% of
shares are held by employees.
Industry:		Health Care Equipment
CONDENSED BALANCE SHEET
(CAD $mm, except per share data)			COMPANY SUMMARY
Balance Sheet Date:	03/31/2021
Cash:				$4.7	• Unique technology platform looking to disrupt the market - Many NMR
Cash/Share:			$0.07
		systems are large, expensive, complex, unsafe and often environmentally
Debt:				$4.6
			unfriendly. Additionally, there are many industries that have a "traditional" way of
Equity (Book Value):		$14.2	analyzing samples, based on a technique or instrument(s) that have often excluded
Equity/Share:			$0.21	NMR based products due to limited access to NMR systems. While the scientific
		instrumentation market has been transitioning slowly toward smaller, compact
CONDENSED INCOME STATEMENTS
systems, the market remains ripe for disruption. Nanalysis, through its
(CAD $mm, except per share data)
		proprietary, innovative product lines, is addressing unmet needs of customers in a
FY - 12/31	Revenue	Net	EPS		variety of applications and industries. Nanalysis product is compact, inexpensive,
		Income			simple to use, as safe to operate as a laptop, and environmentally friendly.
FY19	$8.4	$(1.7)	$(0.03)
FY20	$7.9	$(3.7)	$(0.06)		• Large market opportunity - According to SDi's 2021 Global Assessment
FY21E	$16.5	$(0.3)	$(0.01)		Report, the scientific instrumentation market will exceed $69B in 2021 and is
	expected to grow by over 5% per year. Furthermore, about $1B is spent on NMR
FY22E	$28.1	$5.4	$0.08		testing equipment. Management believes the NMR market can grow by several
LARGEST SHAREHOLDERS		billion dollars per year over the next five years driven by (1) the miniaturization of
	the technology should expand its use in many additional laboratories leading to
Steve Meszaros (former director)	5,807,924	standardization; and (2) new, industry specific applications that in the past, did
not use scientific instrumentation.
Sean Krakiwsky			1,164,429
Michal Okoniewski			1,087,500	• Nanalysis' products are patent protected - Importantly, Nanalysis products
Werner Gartner			791,385	are patent protected and uses proprietary hardware, software, algorithms and are
Martin Burian			518,500	further secured by technology know-how and trade secrets. These protections were
		developed over the past 10-15 years via its innovation, customer feedback, and
Julien Muller			243,927
		manufacturing experience.
Luke Caplette			140,000
Guido Cloetens			43,750	• Growth strategy points to further growth - The Company's strategy is
					focused on organic growth and supplemented with M&A. On the organic side,
					Nanalysis will focus on innovation of new, best-in-class products and seek
STOCK CHART				additional OEM relationships to collaborate and jointly develop new analytical
			solutions. The M&A strategy will seek tuck-in type acquisitions of complimentary
$1.60					business to drive scale economics such that the whole is worth more than the sum
					of its parts.
$1.40
$1.20					• Strong sales backlog - At the end of Q121, Nanalysis has a backlog of 22 units
$1.00					of the 100 MHz NMRs, after sales of 6 units in Q121. On the balance sheet,
					unearned revenue grew from $2.9M at Q420 end to $3.9M at Q121.
$0.80
$0.60					• Valuation - Given the early ramp in revenues, we are using an EV/S multiple
$0.40					analysis. Based on our F22 revenue estimate, we arrive at a valuation range of
					CAD$1.25 to CAD$2.95, with a mid-point of CAD$2.10. See page 6 for further
$0.20					details.
$0.00
Jul-20Aug-20	Sep-20Oct-20	Nov-20Dec-20Jan-21	Mar-21Apr-21	May-21Jun-21Jul-21

See Important Disclosures and Disclaimers at the end of this report.

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BUSINESS OVERVIEW

Nanalysis Scientific Corp., develops, manufactures, and sells compact nuclear magnetic resonance (NMR) spectrometers and magnetic resonance imaging (MRI) equipment. The Company has a 10-year history as a global developer and supplier of portable NMR spectrometers for the industrial instrumentation market. Its products enhance analytical capabilities in quality control, research, teachings, and industrial environments through increasing the availability of high-resolution NMR testing at fractional pricing in portable benchtop tools.

Nanalysis' instruments are notable for their ease of use, low- maintenance, accessibility, affordability, and automatability. The Company sells its products globally into the pharmaceutical, biotech, chemical, security, food, materials, and education industries.

Exhibit 1: Company Timeline.

Source: Company Reports

Nanalysis was founded in January 2009 with the intent to develop the world's first portable NMR spectrometer. After about four years of developing its first product, the Company began shipping its first NMR spectrometer in Q4 2012.

In 2012, the Company became publicly traded through a reverse takeover (RTO) transaction with a shell company and raised $6.5M in financing. The Company is headquartered in Calgary, Canada.

Additionally, in Q1 2020 Nanalysis acquired RS2D S.A.S., a technology company based in Strasbourg, France that designs and builds cutting edge electronics components for MRI and NMR systems. Nanalysis acquired RS2D for €2.9M with a mix of cash and Nanalysis common stock. The common shares are subject to a lock up agreement with a "vesting" schedule where all shares are tradable after January 31, 2023. Additionally, there is an earnout for former shareholders.

Prior to the acquisition, over the prior three years, RS2D generated over €2.5M in revenue per year. The acquisition has added meaningful revenue to Nanalysis. For the trailing twelvemonth period ending March 31, 2021, RS2D revenue was CAD$3.7M.

Exhibit 2: Company Snapshot

Source: Company Reports

The Company performs all its product development and manufacturing in its Calgary and Strasbourg facilities. Additionally, Nanalysis has a direct sales force that targets the US, German, French, and Canadian geographies. The Company uses an indirect model via distributors and dealers to target the remaining parts of the world.

THE MARKET OPPORTUNITY

Nanalysis is focused on increasing the use of NMR technology into various end markets by driving new product releases of accessible, affordable, and automatable NMR Spectrometers. There is currently a paradigm shift underway in the miniaturization of NMR technology and equipment.

Exhibit 3: Paradigm Shift: Massive to Desktop

Source: Company Reports

As can be seen above, many traditional NMR spectrometers (labeled "magnet" on left) are large, expensive, complex, unsafe, often environmentally unfriendly, and are not transportable.

Additionally, there are many industries that have a "traditional" way of analyzing samples, based on a technique or instrument(s). These analytical methods have often excluded NMR spectroscopy due to limited access to the powerful analysis provided by NMR spectrometers.

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While the scientific instrumentation market has been transitioning slowly toward smaller, compact systems, the market remains ripe for disruption. Nanalysis, through its proprietary, innovative product lines, is addressing unmet needs of customers in a variety of applications and industries by bringing NMR spectroscopy to a benchtop formfactor (bottom right images in Exhibit 3).

Growth drivers for the miniaturization of MR systems include:

• Miniaturization is making equipment standard in every lab and other places.
• New industry specific applications offer additional market potential.
• And compact MRI, cloud, and AI should create opportunities in the MRI industry.

WHAT IS BENCHTOP NMR?

Nuclear magnetic resonance (NMR) spectroscopy is the study of molecules by recording the interaction of radiofrequency (Rf) electromagnetic radiations with the nuclei of molecules placed in a strong magnetic field.

Exhibit 4: NMR Spectrometer Schematic

Source: Company Reports

NMR Spectroscopy is one of the most widely used analytical processes by chemists. In short, NMR relies on the phenomenon of nuclear magnetic resonance and provides detailed information about the structure, dynamics, reaction state, and chemical environment of molecules.

With the benchtop spectrometer, it is not possible to have an additional layer of analytical workflow. Key benefits of using benchtop NMR spectrometers over larger traditional NMRs (high-field NMR) include:

• You need quantitative data fast.
• Your high-field NMR spectrometer is always busy.
• You spend too much on outsourcing analytical costs.
• Your application would benefit from NMR spectroscopy, but high-field NMR is not feasible.

Nanalysis notes that benchmark NMR is not meant to replace high-field NMR, but rather to provide an affordable, accessible, and automatable alternative to the more traditional instrumentation. This will also allow NMR spectroscopy to be introduced into applications that were previously underserved or ignored.

PRODUCT PORTFOLIO

Nanalysis' product portfolio consists of high-performance, customizable, compact, and accessible NMR spectrometers and accessories along with traditional NMR, and MRI consoles.

Exhibit 5: Product Portfolio Snapshot

Source: Company Reports

An important component of Nanlysis' products is that they do not require any liquid helium for cooling the magnets. As a result, the Company can more easily sell into markets where liquid helium truck rolls are less prevalent, help customers save money (no helium costs), and lower environmental impacts. Nanalysis' benchtop NMR spectrometers consist of a 100 MHz and 60 MHz lines.

100MHz line

The 100MHz line is Nanalysis' newest product iteration, launched in Q4 2020. The Company states that it is the most powerful benchtop NMR available on the market. The product provides users with:

• Unparalleled resolution - improved chemical shift dispersion.
• Superior sensitivity - run samples at sub milli-molar concentrations.
• Ergonomic displays - large, maneuverable, user-friendly external touch screen computer.
• Unmatched stability - vibration feet, extra thermal regulation.

There are two versions, the 100PRO and 100e. The 100PRO is a multi-channel 100 MHz benchtop spectrometer engineered for simple and fast acquisition of high-performance 1D and 2D NMR data. Additionally, there are multiple nuclei options.

The 100e is a single-channel benchtop spectrometer engineered for high-performance routine screening of 1H NMR spectra.

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Exhibit 6: 100 MHz Benchtop NMR Spectrometers

Source: Company Reports

60MHz line

The 60 MHz is Nanalysis' flagship benchtop NMR spectrometer. It comes in two models:

1. 60PRO - multinuclear
2. 60e - single nuclei

The 60e is a market-leading compact, single channel NMR spectrometer and is a cost-effective tool for customers that require (1) superior resolution and sensitivity, (2) easy acquisition of 1D or 2D NMR experiments, and (3) compact size and weight.

The 60PRO is the next generation compact 60MHz NMR spectrometer. The dual channel spectrometer was designed to improve workflow for customers that require (1) high performance, multinuclear spectral acquisition, (2) advanced features and experiments, and (3) compact size and weight.

Exhibit 7: 60 MHz Benchtop NMR Spectrometers

Source: Company Reports

The 60 MHz portfolio also consists of accessories (AUTOsample- 60 & NMReady-Flow), that enhance the 60 MHz benchtop spectrometers. Additionally, every NMR comes with Nanalysis' OneTouch NMR software. The software allows easy and modifiable spectral acquisition and processing. There are further optional software modules that can also be added to enhance analysis.

Additional Products

The Company also has traditional NMR and MRI products via its subsidiary, RS2D.

• The Pulse console - a compact and configurable NMR system including every required module in an all-in-one unit. The Pulse is intended for the replacement of high- field spectrometers.
• NMR console (hyperpolarization) - The Gecho is a complete RF chain system with an associated power supply and assembled in a 3U box.
• MRI console - The Chameleon4 is a versatile electronic platform designed for a wide range of NMR and MRI products that provides power and flexibility to those systems.

Nanalysis' client list encompasses several end markets including pharmaceutical, biotechnology, chemical, security, food, oil & gas, and educational industries.

Exhibit 8: Representative Client List

Source: Company Reports

Importantly, Nanalysis' products IP is protected by (1) patents (both issued and pending) on the main technical challenges of miniaturizing NMR; (2) proprietary electronics, firmware, software, and enclosure; and (3) proprietary manufacturing processes.

GROWTH STRATEGY

As mentioned, Nanalysis is focused on increasing the use of NMR technology into various end markets by driving new product releases of accessible, affordable, and automatable NMR Spectrometers. Nanalysis' management believes there is a large multi-billion-dollar opportunity to establish a global installed base of compact NMR spectrometers, associated hardware replacements, software updates, consumables, services, and finance.

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Key elements of the Company's long-term strategy include:

• Organic growth of baseline business. The Company believes there are numerous, large scale industrial applications ripe for its product portfolio. These include industrial verticals, academic teaching institutions, research labs to name a few. Continued innovation of new, best-in -classproducts will also drive the baseline business.
• Expand industry partnerships. To accelerate its organic growth, the Company is seeking additional OEM relationships to collaborate and jointly develop new analytical solutions. Recent partnerships include:
  o Bosch collaboration agreement, to develop portable NMR product applications such as on- board fuel analysis for cargo ships.
  o SARTEC collaboration agreement to jointly develop solutions for O&G industry, including analysis of crude oil for refineries.
  o Kriminaltechnisches Institut (KLA) collaboration agreement to develop a mobile
  detector for the identification and quantification of illegal street drugs.
• Execute M&A strategy. The Company intends to make tuck-in type acquisitions of complimentary business. Management states that it is not a roll-up strategy but rather a targeted strategy to add complementary businesses to drive scale economics such that the whole is worth more than the sum of its parts.
• Next generation products/services. Over time, the Company envisions diversifying its product portfolio from an NMR only company. Examples include entering the medical MRI market, adding machine learning, AI, and cloud applications.

Exhibit 9: Growth Strategy Stages

Source: Company Reports

Lastly, the Company believes that it can maintain a 65% gross margin on its products during its growth stages.

RISKS

As with any investment, there are certain risks associated with the Nanalysis operations as well as with the surrounding economic and regulatory environments common to the industry.

Limited operating history - The Company has a limited operating history and is subject to all the business risks and uncertainties associated with any new business, including under- capitalization, cash shortages, personnel limitations, limited financial and other resources, and the risk that it will not achieve its growth objectives.

New product development - The Company's products and services are into an industry that is characterized by rapid technological changes, frequent new product and service introductions, and evolving industry standards and customer needs. Without timely introduction of new products and enhancements, its products could become obsolete.

Access to capital - The Company's ability to manage its strategy is dependent on numerous factors, including availability of working capital, maintaining sufficient profit margins, and execution. If the Company is unable to meet some of its objectives it may need to raise capital. If it is unable to raise the necessary capital, or obtain capital on acceptable terms, its business operations could be materially impacted.

Highly competitive industry - While the markets in which Nanalysis competes contains a limited number of competitors, the participants are highly competitive.

International market operations - The Company faces all risks associated with doing business international that include foreign exchange, regulatory, macroeconomic, and political risk.

Acquisition risks - Part of the Company's strategy is to pursue acquisitions to accelerate growth. There are numerous risks related to acquisitions such as integration risks, unforeseen liabilities, diversion of resources, loss of customers, etc.

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