PyroGenesis Canada Inc.

good day and thank you for standing by welcome to the first quarter 2024 business update conference call at this time all participants are in a listen-only mode please be advised that today's conference is being recorded i would like to hand the conference over to your speaker today steve mccormick vice president of corporate affairs please go ahead thank you very much good morning i'm steve mccormick vice president of corporate affairs for pyrogenesis

Thank you for joining Pyrogenesis 2024 First Quarter Financial Results and Business Update Conference Call. On the call with us today are Mr. Peter Pascali, President and CEO of Pyrogenesis, and Mr. Andre Minella, the company's Chief Financial Officer. The company issued a press release on Tuesday, May 14, 2024, containing a business update and financial results for the first quarter, ended March 31, 2024, which can be viewed 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 Investor Relations Department, and we will try as best as possible to answer questions that are not of a material nature. The company's management will shortly provide prepared remarks reviewing the operational and financial results for the first quarter ending March 31, 2024. I would like to remind everyone that this discussion will include forward-looking information. It is based on certain assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or from 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 plans, 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 EBITDA, modified EBITDA, and backlog, 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 these non-IFRS financial measures, including a reconciliation of EBITDA and modified EBITDA, please refer to the management's Companies Management Discussion and Analysis document, which, along with the financial statements, are available on the company's website at pyrogenesis.com and at cdarplus.ca. Also, a reminder that Pyrogenesis follows Canadian Generally Accepted Accounting Principles, or GAP, where revenue is accrued not on sales, but on a model that reflects a percentage of the work completed for contracts during the period, which can vary based on both the nature of the projects in-house and on a client's own scheduling and logistical decisions, both of which can impact production milestones and the company's ability to book revenue. During these recent years of supply chain, logistical, and inflationary uncertainties, those issues have been more frequent and exacerbating. And as stated in previous reports, the company's revenues are likely to be irregular and unpredictable quarter to quarter as contract-related revenue fluctuates based on various reasons, including those just explained. With that, I will now turn the call over to Mr. Peter Pascali, President and CEO of Pyrogenesis. Please go ahead, Mr. Pascali.

Thanks, Steve. And thank you to everyone that's joining us today for our call. Again, once I have the script I have a script in front of me and I guess people are wondering when they're going to go off script again. Yeah, I like to talk about it. Well, first of all, this is a really good quarter. I mean, what I'm going to talk about in the business overview, I think you're going to get a sense that it's a really good quarter. We're positioned well and things are going in the right direction. What I like to do is, which is not in the script, is talk about something as part of the quarter, as part of where the company is, is certain balance sheet items, accounting regulations, and what I believe to be reality, specifically the elephant in the room where everyone's asking us questions about it. It's these long overdue, past due receivables that are on our balance sheet. And they're there as overdue for a reason. And I'd like to give you some background to that and why we believe or I believe they're totally collectible. The receivable is typically generated because it's a contract that says it's due and it's not paid on time. I mean, that seems to be pretty basic. But the question becomes, what happens if you change the payment terms under the contract? Now, from accounting perspective, the perspective of overdue comes from the original contract. So, changing it doesn't make it less overdue. And I think that's a pretty good accounting principle because if it wasn't there, then everybody would be changing up their contracts so they wouldn't have past overdue amounts. And therefore, if they're not respectful of that law, then investors would not get a good sense of what's overdue and what's really overdue and what's not really overdue. The problem becomes when, like in our situation, when our client has an opportunity to allocate the funds that would have been allocated under the contract to something else, which we believe actually benefits pyrogenesis in the long term. In that situation, which is basically what we have currently before us, we take cognizance of the fact that they're going to use the funds to do something which is better for pyrogenesis at the end of the day. So there's an agreement between the two parties that money that were going to be allocated to the payment schedule were allocated elsewhere. These amounts, notwithstanding that we're in agreement with the client, are considered to be past due. And the reason I bring this up is because there's a lot of questions surrounding this past due. It's not in the same bucket as somebody that's past due and for reasons that are not beneficial to the group. They weren't paid because they just couldn't be paid. They didn't have the money. They never expected, et cetera, et cetera. So my point being that the accounting principle, although good, sometimes catches Situations like ourselves and projects them in a bad light Suffice it to say if you don't get it from what I'm saying We believe that not only are the one that the the the receivables that are posted on our balance sheet But also those that we've taken as reserves are totally collectible and I would venture to guess there are many amongst us that would say if those receivables were converted to cash and you'd have a totally different perspective of the future prospects of this company. And we'll deal with that later on as things progress with our past year receivables being paid down. Look, I'm going to start off with a quick review. I'm going to script now, by the way. I'm going to start off with a quick review of some of the company's top-line financials. followed by a summary of key business activities that occurred during the quarter, before turning the call over to our Chief Financial Officer, Andre Manella. For the first quarter of 2024, we posted revenues of $3.5 million. This represents an increase of 35% year-over-year and up more than 16% from our last quarter, Q4 2023. In my opinion, we've had a nice turnaround from the three-year low revenue mark we recorded in Q1 of 2023. And this quarter marks the fourth consecutive quarter where we've comfortably exceeded that low point. In fact, three out of the four most recent quarters registered revenue greater than the immediately preceding quarter, including this one. Of course, I'm going to be conservative, but the trend is obviously good and we are working hard to continue this momentum throughout the rest of 2024 and beyond. The gross margin posted was 21.7% for the first quarter. Now, let's put this in a little bit of perspective. For comparison with the industries we serve in Q1, the aluminum industry, has returned margins of only 3.37% with a trailing 12 month margin of only 2.8%. Aerospace defense is at 20.1% for the quarter and 18.3% for the 12 months. Iron ore steel industry was the best. It posted 24.5% for both Q1 and trailing 12 months. These numbers represent just a few examples that reflect how tough margins continue to be in heavy industry. It's also important to remember that because of some of our projects are conducted in partnership, aspects such as engineering and production often have intentionally low profit margins. This is especially true for projects like with clients like HPQ, Silicon, where Pyrogenis has sacrificed upfront margin in exchange for backend royalty payments. on the client's back end product. And obviously, government grant related projects normally have lower margins as part of the grant mandate. As we continue our company-wide cost optimization effort, we expect the results of this to continue to be reflected in improved future margins. Our backlog. Our backlog remains very healthy. We posted $28.1 million in backlog, and we continue to stay close to the 30 million backlog number that the company first reached over four years ago in Q4 of 2019. Overall, I think we can all agree that the Q1 financials are both a continuation of the positive trend we've seen in previous three quarters and a very good start for the year. Now for the production highlights of the quarter. A few notes here. Just keep in mind that projects or potential projects that we've previously announced and that do not appear in the summary update or within the MD&A or outlook should not be considered at risk. Noteworthy developments can occur at any time based on project stages and the information presented is a reflection of information on hand. Projects not mentioned may have simply not concluded or not passed milestones worthy of discussion. Also, some projects that we news release, such as investigative studies requested by customers, can be relatively small. And, once concluded, the studies are the property of the customer. The decisions they make as a result of these studies are not in our control and can often take considerable time before manifesting into anything noteworthy. But we announce these projects to give light to the areas where customers are showing interest and where pyrogenesis technology has potential future promise. Under those circumstances, and given the number of small projects and studies the company conducts on behalf of customers, it is generally not deemed necessary to announce their conclusion, especially when the customer's ultimate end goal for these studies are still unknown or are part of a negotiation between pyrogenesis the customer and now a brief reminder on the company's business strategy pyrogenesis is a provider of an expanding selection of technologies that leverage the company's expertise in ultra high temperature processes with this technology ecosystem for heavy industry we can offer a number of solutions in different stages of development from early pilot to full commercialization all concentrated under three verticals that align with economic drivers key to heavy industry. First, the first vertical, energy transition and emission reduction, which focuses on fuel switching or helping heavy industry reduce their fossil fuel use and lower their greenhouse gas emissions by utilizing the company's electrically powered plasma torches and its biogas upgrading technology within various process steps. The second vertical is waste remediation, the safe destruction of hazardous materials, and the recovery and valorization of underlying substances such as chemicals and minerals that can be reused or resold. And the third vertical, commodity security and optimization, which means using pyrogenesis technology to aid in the recovery of viable metals and in the optimization of production output. both of which are meant to improve the availability of critical minerals such as titanium, aluminum, magnesium, and others that are essential for modern manufacturing. For the quarter, within the energy transition and emissions reduction vertical, in January, the company announced the receipt of a $667,000 non-refundable down payment under a master agreement for potential multi-year plasma torch order with a U.S.-based technology company as part of negotiations related to a potential contract valued at over $10 million. In March, the company announced a $450,000 contract for the sale of a plasma torch and furnace system for the use in the development of green cement to a U.S. structural materials entity engaged in the development of advanced cement materials. The project is funded in part by the U.S. Department of Energy. With respect to commodity security and optimization vertical, In January, the company announced the results of a study showing improved economics for its fume silica reactor, or FSR, project, an initiative to convert quartz into fume silica in a single step using a plasma reactor. The study results included potential EBITDA margins three times higher than the industry average of 20% and a capital investment 93% less than that required for building a conventional fume silica plant. In February, the company announced production milestones met for the same FSR project, including the conclusion of engineering design and major fabrication and the placement of orders for all additional periphery materials. In March, the company announced accelerated construction of the pilot plant for the FSR project, having received all major equipment and components. The FSR pilot plant is being constructed within a dedicated space inside pyrogenesis facilities with a 4,000-square-foot custom-designed infrastructure that meets the pilot plant's unique ventilation, safety, and access requirements. Also in the same month, the company announced the acquisition of intellectual property rights related to the PureVap nano-silicon reactor, or NSIR, on a no-cost basis from HBQ nano-silicon powders which had previously announced it would no longer be pursuing the commercial development of this technology in order to focus on other low-hanging initiatives. Under the terms of a 2020 development and purchase agreement between Pyrogenesis and HPQ Nano, all rights in the PureVap NSIR process, including any intellectual property rights, were assigned to HPQ Nano on condition that should HPQ Nano choose not to commercialize the technology, PyroGenesis would have the option to have the ownership of this technology revert back to it at no additional cost. The PureVap MSIR is a proprietary process originally designed and developed by PyroGenesis on behalf of HBQ Nano, a wholly owned subsidiary of HBQ Silicon Inc., that can use different purities of silicon as feedstock to make a wide range of spherical, silicon, nano, and micro powders and wires, for potential use across various applications, including as a potential replacement metal in lithium ion batteries. To read about this and additional events and updates to ongoing projects not discussed in this call, please refer to the corresponding section of the news release of the MD&A, in particular the outlook sections of these documents. I'll be back at the end for some final thoughts, but at this point, I'd like to turn the call over to the company's Chief Financial Officer, Andre Manila, to discuss the financials in more detail. Andre, the floor is yours.

Thank you, Peter, and good morning, everyone. Let me continue with a review of our Q1 financial results. Total revenue for the quarter was $3.5 million compared to $2.6 million for the same period last year, and this represents a continued revenue growth from Q1 of 2023. The revenue increase is $900,000 in Q1 and was due to sales of systems supplied to the U.S. Navy, an increase of $0.7 million due to advancements in engineering services and spare parts. Increased DrossRite-related sales of $0.6 million, resulting from additional services and storage fees incurred in the quarter. Decrease in the PureVap product line as a result of the project being completed in 2023. And finally, Torch-related sales, which decreased, which was also due to a completed project, and the company is now providing 24-7 on-site support. As of May 14, 2024, the company had a backlog of signed and or awarded contracts of $28.1 million. The company's backlog continues to be stable as we continue to add new contracts, make progress, and deliver current projects. The total backlog is well divided into the company's verticals, mainly in energy transition and emission reduction. The remainder is split into commodity security and optimization, and also in waste remediation. Gross profit for Q1 2024 was $0.8 million, or 22% of revenue. compared to a gross profit of $0.5 million or 20% in Q1 of 2023. The improvement in the gross profit is due to the higher profit margin of 22% and on the increased sales in the current quarter, which provided an additional gross profit of $230,000. This is explained by the mix in product sales and the corresponding cost to manufacture these goods. In Q1 2023, margins were affected by the agreement to terminate a contract between the Italian subsidiary of Fire Green Gas and its customers. The company's gross margin achieved in the current quarter comprised no special or one-time measures and is based exclusively on project advancement. Selling, general and administrative expenses were $4.5 million and considerably lower for the quarter as compared to $7.6 million for Q1 of 2023, a reduction of $3 million. The decrease is mainly due to the important items such as professional fees, whereby less legal, IR, and accounting fees were incurred, and more of that work was done in-house. Share-based expenses decreased from $1 million to $0.5 million. This is a non-cash item and relates mainly to grants from prior years, namely 2022 and 2023, and is not repeated in 2024. Also, because of the expected credit loss and bad debt expense, decreased by $1 million as a significant expense was recorded in 2023. As well, the company also benefited from foreign exchange that was caused from the variation of the US to Canadian dollar. And lastly, a decrease in employee compensation and other expenses. As part of the SG&A reduction, cash fixed costs continue to be monitored and tightened. And it's also important to note that of the total SG&A in Q1 of 2024, An excess of $1 million is considered non-cash. The depreciation expense for property and equipment was stable in the quarter, as those assets continued to be amortized over their useful lives. Research and development expenses for Q1 2024 were $0.2 million, compared to $0.3 million for Q1 of 2023, and although slightly lower, R&D levels should remain stable for the future periods. Net finance costs amounted to $0.2 million in the current quarter and compares to a finance income of $0.9 million of Q1 2023. This increase is due to the reversal of the liability related to the balance due on the business combination in Q1 of 2023. The current quarter's interest expense and accretion is related to the convertible debentures and loans which were issued in July and December of 2023. The change in fair value of strategic investment for the current quarter was a loss of 0.2 million versus a gain of 0.3 for 2023. This results from the change in fair value of the common shares of HPQ. And now for comprehensive loss for Q1 2024 was 4.4 million, a favorable impact of 1.8 million when compared to 6.2 million in Q1 of last year. The increase is summarized as the increase in revenue, higher gross margin, and gross profit. a decrease in YesG&A explained earlier, and mainly due to professional fees, share-based expense, and the credit loss and bad debt expense, as well as to finance expenses, which are now normalized for the current quarter, and also by the variation of the fair market value of strategic investments. Lastly, the modified EBITDA, which is also a useful metric in assessing the company's operations, as it excludes non-cash and or discretionary items was a loss of $3.2 million for Q1 of 2024, an improvement of $2.7 million from 2023. It's explained by the comprehensive loss detailed earlier and adjusting mainly for the fair market value adjustments, depreciation amortization, net finance costs, and share-based expenses. At this point, I'll turn the call back over to Peter. Thank you.

Thank you, Andre. In closing, Myself and the board believe we are on the right path for 2024, and there is good reason to have confidence around continued momentum. Our sales pipeline is very robust, and we have some key catalysts on the way in several lines of business. 2024 is already responsible for kicking off major new plasma testing initiatives with large global companies like Constellium, one of the largest aluminum transformation and recycling companies in the world. And while the aluminum industry continues to showcase its incredible potential, We're also making significant headway into the steelmaking and cement industries. Beyond all else, the company remains committed to driving shareholder value and continues to focus on improving efficiency, locating new and better suppliers, and growing its customer base, all to improve margin while engaging with potential customers around the world on a variety of new business opportunities. Thank you once again for joining today's call, and I'll now pass the call back to Steve.

Thank you, Mr. Pascali, and that will mark the end of today's call. We look forward to providing you with additional updates in the near future. Thank you again, and good morning. Operator, please end the call. Thank you for your participation in today's conference.

This does conclude the program.

You may now disconnect. Everyone have a great day.