PyroGenesis Canada Inc.

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Good day, and thank you for standing by. Welcome to the PyroGenesis second quarter 2022 financial results and business update call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rodania Kafal, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining ParaGenesis' second quarter 2022 financial results and business update conference call. On the call with us today are Peter Pasquale, Chief Executive Officer, and Andre Manella, Chief Financial Officer. The company issued a press release yesterday on August 15, 2022, containing business updates and financial results for the second quarter ended June 30, 2022, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact the IR department. The company's management will now provide prepared remarks reviewing the financial and operational results for the second quarter ended June 30, 2022. I would like to remind everyone that this discussion will include forward-looking information that is based on certain assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Forward-looking information provided in this call speaks only as of the date of this call and is based on the plan's beliefs estimates, projections, expectations, opinions, and assumptions of management as of today's date. There can be no assurance that forward-looking information will prove to be accurate and you should not place undue reliance on forward-looking information. Pyrogenesis disclaims any obligation to update any forward-looking information or to explain any material difference between subsequent actual events and such forward-looking information except as required by applicable law. In addition, during the course of this call, there may also be references to certain non-IFRS financial measures, including references to Adjust Net Loss and Adjusted EBITDA, which do not have any standardized meaning under IFRS, and therefore may not be comparable to similar measures presented by other companies. For more information about both forward-looking information and non-IFRS financial measures, including a reconciliation of each of adjusted net loss and adjusted EBITDA to net loss, please refer to the company's management discussion and analysis, which along with the financial statements are available on the company's website at www.paragenesis.com and the company's corporate filings on CEDAR at www.cedar.com. With that, I will now turn the call over to Peter Pescali, President and CEO. Please go ahead, Peter.

Thank you very much, Rodina. And thank you, everyone, for joining us today on our call. Before I proceed with a prepared text, which guides me through the... through this section, the business overview of the call today. I'd like to make some comments to try and give some color to what I'm about to say. People that know me know that I'm not the type of guy to blow smoke wherever one blows smoke. And to say that I'm happy with the numbers would be a serious mistake. I'm not happy with these numbers, but I'm extremely happy with the quarter. And I like to focus on a number of elements that will help you understand better my comments in the business overview, specifically to the fact that things have been delayed. And we've mentioned time and time again why. But they're not serious delays. You'd expect natural delays, but they're different because our potential clients are massive, and they simply face many different and significant challenges these days, which have to do with everything from labor costs to supply chain and things like that. We're a small company, and we manage it very well, but our clients do have delays. And within the quarter, you'll see that we've made significant strides. If you look at our margins, we commented on it. I won't comment on it right now. They're out of this world. Our backlog is high. Our cash and investments, and let me put it to you this way. If you look at our cash and the cash equivalents, our accounts receivable, and our strategic investment, and assume they're all cash, no one would have a worry. You have to have a conference that manages and understands what they're doing, and that these receivables are good and we have a plan. The revenues, when you look at our revenues and you put them in context of the past few years, they're at six months over $10 million. In 2019, they were $4 million, $4.8 million. So it just underscores the fact that it's not a mistake or something that's a reversal. We had two solid years and six solid months 2020, 2021, 17 million, 31 million, 10 million now, we're there. And what's very exciting is that pyrogenesis is well positioned from a balance sheet perspective, from a financeability perspective, from a debt perspective. We have no debt on our balance sheets. And the environment to reduce greenhouse gases, the environment to reduce the dependency on diesel is lining up precisely to fit our strategic goals. So with that as a background, I'm going to say I'm not happy with the numbers themselves. Under normal circumstances, they would be much better. But the company is doing phenomenally. During the quarter, Pyrogenesis achieved some of its greatest corporate milestones to date. Major advancements for both Pyrogenesis, its customers, and the industries they serve. These achievements include producing and delivering plasma torches for the first ever in factory use within an iron pelletization furnace. A major upstream step in the steelmaking process and the movement from sample size to commercial scale batch production of titanium metal powder for 3D printing and out of manufacturing. utilizing the company's groundbreaking next-gen plasma atomization system. Building on decades of research and development, these milestones have positioned pyrogenesis for accelerated business growth and are anticipated to provide potentially significant orders through 2023 and beyond. More importantly, As the global economy transitions out of the disruption it has faced over the past several quarters, we expect to see a return to logistical and resourcing stability for heavy industry and government customers throughout the rest of 2022 and 2023, but with a renewed sense of urgency. Our value proposition remains the same, yet with the events that have unfolded over the past two years, which have realigned the precariousness of the world's supply chain, fossil fuel energy availability, the workforce, and material cost certainty, our generous technology offering looks to be in an even better position. We continue to execute on our business growth strategy by offering technology solutions that provide benefits from greenhouse gas emissions reduction, clean electric fuel sources, safe waste destruction, and improved production output and quality that take advantage of the company's expertise in patented ultra-high temperature processes for heavy industry. We also continue to build upon established customer relationships, introducing new solutions, and entering new markets, setting us up for ongoing success for years to come. The company's backlog of signed contracts is 35.3 million. We expect to continue to grow this figure as we have numerous proposals and bids well underway, and many more in development. We maintain our competitive advantage by remaining at the forefront of technology development and commercialization. Our core competencies allow Pyrogenesis to lead the way in providing innovative ultra-high temperature solutions, including plasma torches, plasma weight processes, metallurgical processes, and engineering services to the global marketplace of heavy industry sectors such as aluminum, steelmaking, and iron ore production. 2022 has brought about more circumstances that highlight how our technology solutions will be in even greater demand. In particular, the conflict in Ukraine has exhibited how geopolitical influences will continue to impact the supply of metals that are already under extraordinary market pressure. As supply chain issues worries about supply reductions and additional sanctions on Russia, who's a major producer of the world's aluminum supplies, caused massive fluctuations to aluminum spot prices. The conflict also more fully exposed the vulnerability of aluminum producers to power availability and energy price uncertainty as energy supply challenges that were already being experienced by European and Asian metal producers were exasperated during this conflict. All of these factors show that with global metal demand growing, which is anticipated to grow 80% by 2050, and industry carbon reduction targets not yet on track to meet their goals, aluminum producers must find ways to improve their efficiency and increase yields and increase their yield of high-quality metal from current production, all while lowering their carbon footprint. Pyrogenesis' range of technology solutions provide just such an opportunity, with the company's dross rate systems providing industry-leading dross recovery rates of high-quality aluminum, in-line and on-site, with a lower operating expense and lower carbon footprint than all competing technologies. Meanwhile, Pyrogenesis' mainstream plasma torch offering provides another technology-driven solution for metal producers looking to reduce their reliance on a volatile natural gas and diesel supply chain within any aspect of their operations that require metal melting or heating, while again eliminating fossil fuel emissions. These same or similar pressures are affecting the global steelmaking industry into which the company has already sold and now delivered initial clean electric non-combustion plasma torches for final pre-order test runs. Macroeconomic pressures may in fact serve to expedite the need for faster implementation over the next year or more. For clarity, as often stated, PyroGenesis' product lines do not depend on environmental incentives such as tax credits, GHG certificates, or environmental subsidies to be economically viable. With the increased industry carbon reduction commitments, it is anticipated that pyrogenesis growth drivers will expand and shareholders will see increased value. The company is, however, not immune to how COVID-19 and other external factors negatively impacted businesses over the past two years, specifically related to the workforce and, more importantly, the supply chain. And while we believe that we can do little about the strain on our customers and prospects, pyrogenesis is still well positioned. Through various mitigation measures, these challenges continue to be dealt with in an effective manner. We expect even greater improvements as the impact of COVID-19 and other external factors continue to recede during the remainder of 2022. We believe that the pyrogenesis organic growth will be spurred owned by a multitude of events, including, one, the natural growth of our existing offerings, which continue to accelerate. Two, leveraging our insider golden ticket advantage that we have discussed, and the fact that the inline hot dross-enabled dross-like metal recovery system is installed inside a customer's facility versus the legacy cold dross roll reef salt furnace approach that is installed off-site. This allows us to see firsthand some of the additional and peripheral needs of our customers. Three, exploring, testing, and rapidly commercializing new ways to provide unique solutions and value that helps industries deal with some of the most pressing environmental, engineering, and energy problems. And four, building new manufacturing and chemical recovery facilities in overseas markets to pursue the construction of a European production facility for metal powder production. Presenting market-ready technology solutions to heavy industry players who can now benefit from the recently passed US Climate Change and Inflation Bill, known as the Inflation Reduction Act, an act that provisions billions in incentives for carbon and GHG reduction and fuel switching to clean energy and electricity. Over the past several years, Pyrogenesis has successfully positioned each of its business lines for rapid growth by strategically partnering with multi-billion dollar entities. These entities each have identified Pyrogenesis offerings to be unique in demand that have such a commercial nature as to warrant the long-term supportive relationships that the company has experienced while it ramps up various technologies to commercialization. We expect that these relationships have us well-positioned to transition into significant revenue streams once full commercialization is achieved. Turning now to the aluminum business line, During the quarter, we announced that our Drosserite waste metal recovery technology had been successfully commissioned at Madden Aluminum in Saudi Arabia, one of the world's largest primary aluminum producers with 2021 revenue in excess of US$7 billion. There, the Drosserite technology is helping to service the Madden plant in Ras El Khair, a joint venture operation with Alcoa that is the largest and most efficient vertically integrated aluminum complex in the world, and includes one of the world's largest smelters. This is indeed a feather in Pyrogenesis' cap. At Madden, the first three DrossRite systems passed site acceptance testing and were fully commissioned, with the remaining four already manufactured and awaiting final shipment at the end user's request. For the joint venture technology geared to handle the leftover residues resulting from the processing of waste stream metal draws, the pre-launch requirements and considerations have entered the final stage. Chemical residue samples from draws produced at one of the company's client facilities are being tested in two different countries, and the results of those tests will determine the final steps. We believe that valorizing the residues and producing high-end products will further define us as the go-to company for all dross-related processing. For the partnership with Aluminaire Adelette, the largest primary aluminum smelter in the Americas, and co-owned by Rio Tinto and Norsk Hydro, work continues. We are developing a solution to safely recover various metals and compounds from the heavily contaminated carbon lining of aluminum smelters known as spent pot linings. Lab scale tests have now concluded and the initial pilot phase is in development. Turning now to the steelmaking and iron ore business. As most of you know, steelmaking is one of the most carbon emission intensive industries in the world. Estimated to be responsible for between seven and twelve percent of all global fossil fuel and greenhouse gas emissions When combined with iron ore these two related issues account for almost one quarter of all industrial emissions The industry continues to be under intense pressure including huge financial penalties to find emission reductions During the quarter Pyrogenes achieved a major milestone when after extensive modeling, simulations, business case development, production, and live factory tests, occurring during a period that was engulfed by a global pandemic, by the way, our plasma torch system for iron repelatization was produced, assembled, and shipped to the clients. In preparation for the first ever live factory usage and factory acceptance testing toward that carbon reduction goal. As previously disclosed, that client is a multi-billion dollar international producer of iron ore pellets and one of the largest in the industry, whose name will remain confidential for competitive reasons. The client, who we refer to as Client A, which has committed to reduce its GHG emissions, has over 10 iron ore pelletization plants, each possibly requiring up to 50 plasma torches, totaling more than 500 torches in total. We have provided in the past a cost estimate for 36 plasma torches to that same client at a value of between $95 and $150 million, just for 36 plasma torches. Remember, they may need 500. The range is an estimate due to usage and customization uncertainties, which will be more clearly defined in due course. Other previously announced clients, client B, one of the largest iron ore processors in the world, who has signed a $6 million contract with the company for four plasma torches for their pelletization system, and client C, who is not only a significant player in the iron ore pelletizing industry, but is also a major player in the steel industry, both continue to progress at their own pace. For client B, production of four torches is underway. As previously announced, client B has advised Pyrogenesis that upon the successful implementation of the torches, Subsequent orders are expected to be for approximately 130 plasma torches. PyroGenesis expects that the previously mentioned government initiatives geared to stimulating their respective economies by promoting and funding environmental technologies and infrastructure projects will only serve to increase interest in PyroGenesis plasma torch offerings to other companies in this space and other spaces as well. While potential clients seeking government support for large initiatives may draw out the onset of these large contracts, the sheer number of potential customers and the fact that Pyrogenesis will engage with many of them in different stages at different times will help us to ensure a long, overlapping pipeline of potential projects. In addition, Pyrogenesis continues to target other industries which are experiencing significant pressure to reduce greenhouse gases. and which utilize fossil fuel burners as well, such as the cement industry, aluminum, and automotive industries. With respect to manufacturing, our metal powders business line also saw a major milestone in Q2. The company's next-gen facility, which incorporates all the pre-to-disclosed benefits, such as increased production, lower capital and operating expenditures, announced having produced and delivered two separate 100-kilogram orders for titanium powders, the first two commercial batch systems for the system after months of testing and sample size production. These orders were both an important commercial milestone as well as a further validation of pyrogenesis process and ability to supply some of the highest quality powder produced to the atom manufacturing industry using our next-gen plasma atomization process. This process is a significant departure and upgrade from conventional plasma atomization, a technology, by the way, that PowerGenesis also invented and coined the term for, and which is still considered the gold standard for the production of metal powder. The two orders came via our European business partner, Aubert & Gervais, who is a world leader in industrializing high-performance steel, super alloy, aluminum, and titanium alloys for over a century. More specifically, they are a recognized supplier of metal powders for atom manufacturing, serving the aerospace, energy, transport, medical, defense, automotive, and other large-scale demanding markets. Separately, and of note, a major tier one global aerospace company has already entered into an agreement with Pyrogenesis to formally qualify its metal powder at considerable expense to the global aerospace company with a view towards having Pyrogenesis become a supplier. Under this agreement, the client has been performing an in-depth qualification process with pyrogenesis, a procedure typically required before a company can become an approved supplier. The process was established to evaluate pyrogenesis manufacturing methods and test samples of powder for batch-to-batch consistency. We continue to expect to see significant year-over-year improvements in our 3D metal powders offering as our next-gen facility is now officially online and operational. There are additional major top-tier aerospace companies and OEMs in both Europe and North America eagerly awaiting powders from this new state-of-the-art production line, and we are currently in the process of supplying sample powders to them for analysis. We expect that such developments will continue and will translate into significant improvements in revenue by this segment in the mid to long term. Pyrogenesis sees 2022 as a foundational year from which we will drive exponential growth and position ourselves as a leader in the market for decades to come. We plan to take advantage of our unique position in the market and our broad offerings to accelerate growth, with a particular emphasis on offerings geared to aggressively reducing GHG emissions and the world's carbon footprint, while finding and offering solutions to pressing environmental, engineering, and energy challenges while driving cost savings for our clients. At this point, I'll be back later to answer questions, but at this point, I'd like to turn the call over to our Chief Financial Officer, Andre Manela, to go over the financials in detail. Please go ahead, Andre.

Thank you, Peter, and good morning, everyone. The company, as with much of the industrial technology and manufacturing sectors, has felt the repercussions of macroeconomic headwinds. that have affected the planning, logistics, and spending of its customers and its sales pipeline targets. These conditions have weighed, sometimes heavily, on both the company's top and bottom line, with potential or planned sales being impacted by customer resourcing, staffing, and purchasing delays, and with continued governmental and logistical issues preventing other customers from finalizing contract negotiations or taking delivery of their fully completed orders. orders that represent significant revenue and income to the company once they can be moved out of the warehouse what was anticipated to be a major growth first half has adjusted to be more of a modest stage setting for the second half of the year and into 2023 as existing and prospective customers move back their planning and decision making to the quarter to accommodate their own interruptions now moving to the income statement Total revenue for the current quarter was $5.8 million compared to $8.3 million for the same period last year. And total revenue for the first six months of 2022 was $10 million compared to $14.5 million for the same period last year. It's also important to note that in Q2 of 2021, it includes $3.3 million of patent sales, which are not repeated in the first half of 2022. And such sales represent a significant high growth margin percentage. The revenue decrease was mainly due to a decrease in sales related to Dropside and PureVap, as well as decrease in support related to the U.S. Navy. This was offset by an increase in TOR sales and sales related to biogas upgrading and pollution control. As of the filing the financial statement yesterday, August 15, 2022, the company had a backlog of signed contracts of over $35 million. Growth profit for the three months ended June 30th, 2022 was two and a half million or 43% of revenue compared to a growth profit of 4.9 million or 60% for the same three months period ended last year on June 30th, 2021. Growth profit for the first six months of the year, the current year, were 3.6 million or 35% compared to a growth profit of 7.1 million or 49% for the first six months of 2021. The decrease in growth profit was attributable to an increase in employee compensation, subcontracting, manufacturing overhead costs, foreign exchange, and amortization of intangible assets. But it was also offset by an increase in direct materials and other subcontracting costs. Also, again, note that in 2021, this included patent sales, which have a very high gross margin percentage. Selling and administrative expenses were $7.1 million and $12.7 million for the first three- and six-month periods of June 30, 2022, respectively. This compares to $6.7 and $10.4 million for the first three- and six-month period ended June 30, 2021, respectively. The increase in SG&A expenses were mainly attributable to the PIRO Green Gap Acquisition, along with an increase in employee compensation, professional fees, office and general expenses, travel both local and abroad, and the depreciation of property and equipment, depreciation of the ROU asset, government grants, ICCs, and other expenses. Additionally, the share-based expense decreased by 51% to $1.6 million for the current quarter of 2022, which compares to $3.3 million for the same quarter of 2021. R&D expenses for the current quarter was $800,000, an increase of 13% when compared to 700,000 for the three months ended June 30th, 2021. During the first six months of fiscal 22, net spending on internal R&D was 1.3 million compared to close to 1 million in 2021, primarily due to an increase in R&D activities that were performed. The comprehensive loss for the current quarter ended June 30th, 2022 was 13 million compared to a net loss of 20.4 million for the same quarter of 2021, which represents a decrease of 36% or a reduction of over $7 million over the current quarter. Modified EBITDA, which we consider a useful metric in measuring the ongoing operations, was a $3.2 million loss compared to a gain of 1.1 in 2021. The modified EBITDA excludes the $1.6 million of non-cash share-based expense, as well as a $7.4 million adjustment to the fair market value of the strategic investment caused by the decreased market value of the common shares and warrants owned by the company of HPQ Silicon Resources Inc. The modified EBITDA also adjusts for an increase in depreciation of property and equipment, an increase in depreciation of the ROU assets, increase in amortization of intangible assets, and an increase in financial expenses. As of June 30, 2022, the company had a $1.3 million of cash and cash equipment balance. It's key to point out that our goals margin for this quarter were a terrific 43%, a high number which surpasses many of our counterparts and the averages for our companies in the industries that we primarily serve, such as aluminum, iron, steel, aerospace, and defense. Additionally, the company has completed or nearly completed several projects that are laid due to client-side challenges and decision-making. As a result, a slower recognition of costs or cost of sales means a slower percentage of revenue recognized. With these factors related to client-side logistics and resourcing factors, and not for the company's sales or production efforts, it's noteworthy that this should be mentioned for the benefit of investors' understanding. In addition, those contracts which are close to the final delivery stage tend to incur costs at a slower pace, as well as the corresponding revenue that's being recognized at a slower pace. At this point, I'll turn the call back over to Peter.

Thank you very much, Andre. In conclusion, ladies and gentlemen, I have to say we're very pleased with the progress we have made during the quarter and are confident that we have set the stage for continued success. While the headwinds we have described have interrupted the intentions of some of our clients and prospects during the first half of the year, it's not to be unexpected. And Pyrogenics continues to see 2022 as a platform from which decades of growth will emerge. Moving forward, we plan to take advantage of our unique position and expect our main business offerings to accelerate growth, with a particular emphasis, as I mentioned, on offerings geared toward aggressively reducing greenhouse gas emissions, and the world's carbon footprint, while finding and offering solutions to even more of the world's most pressing environmental, engineering, and energy challenges. We, of course, remain committed to driving shareholder value and look forward to providing further updates as developments unfold. At this point, I'd like to thank you once again for joining the call today and would like to open up the call to questions.

Operator? Thank you.

Thank you. As a reminder, to ask a question, you need to press star 1-1 on your telephone. Once again, that's star 1-1. Please stand by while you compile the Q&A roster. Our first question comes from the line of Mac Murray-Well from Cormac Securities. Your line is open.

Hi, good morning. I just wanted to drill down a bit into the backlog. Can you segment the backlog into the same categories as your revenue?

Do you have that, Andre, off the top of your head? Yeah, what I can say about the backlog, it breaks down by product. It's really the majority. The three top sections would be drop rate, biogas upgrading, and some of the PFAS, which makes up the three biggest parts of the $35 million.

Okay. And then in terms of size, like, do you have, like, are there 10 contracts or, like, six contracts? Like, can you give us an idea of sort of the number of contracts and if there's a big variation in the dollar value of each one?

They're pretty diverse and spread out from different countries, but they range anywhere from half a million up to several million. So, I mean, in total, I'd say there's over 10 contracts on the backlog list.

Okay. So the largest is only a couple million?

Yeah, that'd be fair to say. A couple million, maybe a little bit more.

I don't want to put any words into Max's question, but I think he's wondering if it's overloaded all into one contract with one client.

Definitely no, it's not overloaded all into one client.

And how much of it is 12-month deliverable?

I think most of our backlog is between 12 and 15 months. Okay. Most, yeah.

Okay. Okay, good. And in terms of gross margin, because it's dropped about 20% or so or 30% over the last year, is there – when you look at the gross margin of that backlog, is there anything – that we can say that you could share about that? Like, does it look, is it more like the 60 or is it more like the 40 or is it all over the map?

Well, I think it depends on the product mix. Just also keep in mind that when you say there's a drop in the gross margin versus last year, last year Q2 2021 had the DHPQ patent sales, which have a very high gross margin. So that was definitely playing the mix, but looking for it, it was a mix of everything from biogas drops, right? And combination of backlog, I'd say, but when I read the percentage, it's probably around the high 30 to 40% for sure. But definitely, it won't be similar to a Q2 of 2021, which is, you know, not usually high because of the back sale.

Okay, and so when, in terms of the gross margin in the latest quarter, have you seen more of an impact from cost inflation or more of an impact in your own pricing strategy in terms of sort of driving demand?

I'd say a little bit of both, but we've been able to source materials and increase our inventory, so we've been able to offset the impact of inflation by our purchasing abilities and reducing our lead time in purchasing in advance to mitigate the impact of inflation.

Okay. On the SG&A, is this a good, like a new run rate that we should be looking at, or are there some one-times or unusuals in there that you want to flag?

Looking at the detail, there's no unusual items. It's more of a run rate. I mean, the stock rate compensation is fair. We're a year-to-year comparison of the DNO insurance, so it's more representative of the actual fact. And obviously, with changes in the DNO and insurance, industries. We're hoping that the rates will go down for next year, but it's more representative of a recurring year.

Okay, because there was a lot of professional, there's a big jump in professional fees, and is there a chunk of legal in there that's not normal?

Well, it depends if you're looking at the three to six months, but there's also timing, so keep in mind that when we have professional services in January, February, March for the year-end audits and so on, it'll I'll set the timing a little bit. So depending if you're looking at the first three months or the first six months.

Okay, I'll dig into that.

Nothing unusual that I can really mention right now.

Okay. And then the last question I had was just on, you spoke on some European capacity. What's the cost and timing of that initiative?

For the powder production? We're still talking about doing that in Europe as a joint venture with someone. We definitely need to put some powder production into Europe. I'd say, I'm just guessing here, Max, to give you a time frame, but we'd like to have it up next year. To have it up next year would be very tight.

Okay.

We haven't chosen the partner yet. Sorry?

Okay. No, that's good. That's all my questions. Thank you. Very good. Thanks, Max. Thanks for your question.

Thank you. One more for our next question. Our next question comes from Greg McDonald from Lord Rock. Your line is open.

Thank you. Hi, guys. Good morning. Peter, I wanted to ask you a question on the overall logistical and resource headwinds that you're talking about. My assumption on that is from the commentary that that's predominantly the aluminum and steel opportunities, not not anything to do with what's going on with metal powders. Am I right in making that assumption?

Yes. I mean, we're finding these delays across the board, but specifically the 90-day delay that we announced with the iron ore pelletization client had to do with some delays in getting their facility ready and prepped the way they wanted to. They had some delays on their side, yes.

Okay. Is there anything generally that we should be looking at? Is this an issue with geopolitical challenges more than others? What are some of the main challenges that these clients are facing that we should be looking at as inputs if things change in the future? And I'm thinking not just on inputs, but the Inflation Reduction Act that you mentioned. Is there anything in the Inflation Reduction Act, because that is relatively recent that you think could change some of the views on timelines from your clients? And or is there anything in the Inflation Reduction Act that you specifically are excited about relative to before seeing the details of it?

Well, I think there's a number of questions in your question. I think the first one has to speak to geopolitical influences. And no, there's no geopolitical influences really, that are negatively impacting our situation. If anything, it's positively impacting our situation. Now, I think the second one you asked me for, what is the biggest concern or the biggest... It's just, I mean, you read it in the paper every day. I mean, I'm not... There's supply chain issues. I mean, we suffer them. We're managing. We're a small company, so we can duck and weave and do things quickly. But Bitter companies don't have that. They're facing supply chain. Let's say an imaginary client, client W. Client W wants to get things ready for us or they want to do something. They can't source the power supply or the pump or whatever it happens to be. It takes time. Our clients are having massive, massive problems when it comes to actually getting the supply, not our supply, not us, the infrastructure, the things they need to get it, to accept us. The same thing is happening in Saudi Arabia. We have draws right systems here ready to shift. They're not ready. They're not ready to accept them because of supply, primarily because of supply chain issues. Then, with that I'm aware of, and you're aware of, I imagine they also have labor shortages just like everybody else does, trying to get the right people the right place to do the job. So these things are exasperating the delays, but delays are normal in these type of businesses, but exasperation delay. The fundamental issue is nothing has really changed. Nothing has really changed with our offerings, their relevance. In fact, they're even more relevant. When you look at the app that you mentioned, you're asking me, you know, what's the takeaway from that? Well, the takeaway is, you know, pop open the bottle of champagne. There's governments putting billions of dollars into supporting companies to buy my product. I mean, if you can get a coupon, if someone's giving someone a coupon to buy my product, 50% off, don't you think I'm pretty excited about it? I'm pretty excited about it. Now, we've known this, by the way, for some time now. There's been government incentives to reduce greenhouse gases, et cetera, et cetera. And as you mentioned in the past, Even big companies would be stupid not to take advantage of it. Some of our offerings require some infrastructure changes. There's infrastructure support for infrastructure changes. So when you've got ancient, old, you know, smokestack industries that know intellectually and fundamentally they have to make infrastructure change. They've been delaying it for the past decade. And all of a sudden, they've got incentives to do it. I think they jump on it, right? So, yes, these are all excellent programs that are supporting our business. They're supporting our product. So our customer base, so we already have the customer base that's excited, should expand because there may be some on the board line that may not have wanted to do it for A, B, and C reasons. Well, here you've got government support for it. So I think I've answered all your questions. I think I did. There's a number of questions in your question. I hope I did.

No, you definitely did on the second issue of the Inflation Reduction Act. It's something that I've heard analyzed as it's more a carrot than a stick approach. There's lots of funding going into it. I guess what I was asking through that indirectly was, is there one area of your business relative to others that you get particularly excited about just because you know new money is definitely going to go in relative to what it was before this? That's all.

Oh, yeah. So, basically, INR prioritization, draws right, 3D printing. They line up for all three of them, even 3D printing.

Right. Okay. The second question I had was on the backlog. You made some comments on the $35 million growing through numerous bids that you have going on right now. Can we categorize that or define that as a mix that is typical of the revenue line today? Or is there an opportunity for growth

one area versus another so I guess indirectly I'm asking metal powders relative to pelletization anything going on in the steel industry in the aluminum industry so we're talking about backlog not pipeline so backlog to us is signed contracts so tight contracts we signed we're working on them we've identified them if you're asking me where do I think the growth will come from in the shortest time frame it's without a doubt iron ore pelletization and Drossrite. Because Drossrite, we're already out there. We've got a very compelling offering, which includes taking care of the residues, and we're also talking about some upstream plasma-based solutions. So we're really locking up, slowly, slowly, the Drossrite offering to almost be very difficult to compete against this in the Drossrite. So that's very exciting. On the art of privatization, generally our torches, which can be used to reduce greenhouse gases and reduce the dependency on diesel fuel. That's very, very exciting as well, as you know. So those are the two ones that are front row center. And 3D printing is quickly coming up the back as it's going through the phases of getting qualified by very significant five-star OEMs. Now here's something I'll throw out to you. Here's something I'll throw out to you. The challenges between iron ore pelletization and our torches and Drossrite. When we sell one torch for between $1 and $2 million, it's very similar to just selling one Drossrite system or half a Drossrite system. One might ask, why are you doing one versus the other? And that's very interesting because there's recurring revenues from both. Both are very exciting. But the most exciting, I think, is what our torches single-handedly can do to reduce greenhouse gases and dependency on diesel. It's our area of expertise. The world needs it. It's very simple for us to implement.

And you made mention of pipeline. I'm always curious about what's going on in metal powders. Has anything changed in the opportunity to see revenue near-term in the metal powders business, or is that still a business that will take time for companies to get comfortable with?

Well, I think... I think it is a long road path to getting acceptance by these types of aerospace companies. It is a long path. The nature of the industry dictates it, demands it. I would say we're about 90% of the way there. Now, why do I say that? Because we've mentioned that They mentioned two things that are an indication that things are 90% of the way there. One is the North American OEM is spending lots of money. They visit our facility. They've seen what we're doing. So now they're spending the money to tick the boxes, as they have to in the industry, to demonstrate that our powders are of the type that they want to buy. So that's taking place now. It can't go faster. There's a certain – but we're there. And so I would say we're 90% of the way there because they won't spend the money willy-nilly on just any job shop in the world. They've done their due diligence, they've put their name on their reputation online, and they've got the funding to do it. The other thing that demonstrates that we're 90% of the way there is the need to establish a powder production facility in Europe to mitigate the transportation costs. We mentioned we sent two 100-kilogram orders to Europe recently. So when you're doing that, I guess you don't care too much about the transportation costs. But to set up a facility and to get into bed with someone in Europe to do that would indicate that there is some reason to doing it. It's not just, you know, the giggles. So those are two things I could direct your attention to to determine how far along we are And I'm putting a 90% down the road on that. And you can imagine that once the orders start being processed by the North American OEM, let's take that as an example, you can imagine that would give us a lot of credibility, particularly with the name, and open up the door to many other opportunities in that industry. So I think we're 90% of the way there.

Okay, and the final question I have is, with metal powders you mentioned in the press release, and I've heard this before, developing an inventory, which suggests that there's a standing opportunity to be either selling or providing metal powders for test purposes. Is that at all, I mean, I'm asking out of the blue here, is that at all part of an opportunity for revenue in the near term?

Inventory, how you'd operate this is you do some runs and you sell something, you keep some inventory. It's just a smart way of doing it. Yeah, so keeping an inventory of powders so you could ship them would be necessary for sure.

It suggests smaller batch. Peter, am I understanding this correctly? No, not at all.

Right now we're doing smaller batches, but when we go into commercialization, we'd have to keep an inventory... for the ups and downs of the demand. No, no, we definitely keep it. We keep inventory for... It just makes sense. I mean, when we do a run, you don't want to stop it at X. If you continue doing the run, it's cheaper. So you do a run, you have an estimate. You make an estimate of what your needs will be over the next several months, and you inventory accordingly. Got it. Managing sales and inventories is old hat. I mean, we don't have to reinvent the wheel. There's lots of standards for that.

Got it. Okay. Thanks for answering my question.

Pleasure. Thanks for joining us today. Thank you.

And as a reminder, that's star one for questions, star one. One moment for our next question.

Our next question will come from the line of Alan Thompson.

As an investor, your line is open.

Hey, Mr. Thompson. Good morning. Good morning, sir. How are you doing?

Good, thank you. I was just wondering if you could give us an update on any improvements made to address the internal control shortfalls cited in your year-end financials. I'm sorry, did you hear that, Andre?

Yeah, I think the question is update on internal controls.

Improvements made to your internal control systems that were cited, the shortfalls that were cited in your hearing financials?

Yeah.

Oh, yeah.

Yeah, I think I understand the question. What I have to say, we keep looking at our processes. We address all the weaknesses that we have. We address it mainly by implementing a series of compensated controls that we execute on a quarterly basis. So given the timing of when we have to have all the internal controls in place and eventually the assessment by auditors, we'll continue to improve the controls, working with external consultants and getting resources that we need to make sure that there's no unaddressed risk in our financial statements. So we're moving forward and obviously going by priority, but our main focus is making sure we have all the proper compensated controls and improving our ERP IT systems to make sure everything is there to mitigate any risk that we have.

Just for those who are listening and need some color on that, these standards were what we had to get to as a result of uplifting and being on the NASDAQ. You don't do them in advance. NASDAQ, for example, dictates that there should be certain levels of controls. When you uplift, they give you a certain period of time to do it within. We're well within the time period and we're implementing those controls. Remember that we've been a client of the U.S. Navy for many, many, many years and we have lots of controls and reporting procedures in place. We just have to adapt them and tweak them for NASDAQ's requirements. So this is old hat for us. For us to adapt to very, very stringent controls is nothing unusual. However, accounting processes and standards dictated that we had to adapt highlighted in our financials once we uplift it.

And we prefer being transparent and disclosing everything that we're able to illustrate in the financial statements. So we're just focusing on that to clear up any issues and making sure our financials are free of any mistakes.

Thank you.

Mr. Thompson, was that good for you?

Yes, thank you.

Thank you. Would you have another question?

I'm not showing any further questions at this time. I'm not showing any further questions at this time. I'll turn the call over to Peter for any closing remarks.

Well, ladies and gentlemen, as I started off by telling you, the numbers themselves don't excite me this year. However, for those who have the time to peel back the onion, they realize that we have made amazing strides towards our goal. We haven't faltered. Nothing's falling off the deck of the ship. Everything is moving forward and in fact the world is lining up to support our product line and our offerings by providing a government support and incentives and a general interest in reducing greenhouse gases and a fundamental interest in reducing the need to rely on diesel. So your company is well positioned, well led if I may. And we're very excited here. Moral is high because of what's happening on the ground and what we're doing with our technology. I appreciate the patience. I appreciate the time you've put into listening to me today. And I look forward to updating you in the near future with very interesting developments. Thanks a lot.

And this concludes you for participating. You may now disconnect, Spady. You may now disconnect. Everyone have a great day.

Thanks.

Thank you.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.