NanoXplore Inc.

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Welcome to the Q1 2023 Nano Explore Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you'll need to press star 1-1 on your phone. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Mr. Martin Kajne. Please go ahead.

Merci opérateur.

Bonjour à tous et bienvenue à la conférence téléphonique du premier trimestre 2023 de Nano Explore. Good morning everyone and welcome to Nano Explore's 2023 first quarter conference call. Today I'm here with Soroj Nazarpo, our President and CEO, and Pedro Azevedo, our CFO. We will start with our prepared remarks and then a Q&A. In addition, last night we have filed our five-year strategic plan presentation on CDAR. And it can also be found in our investor section under events and presentations at www.nanoexport.ca. Please note that our discussion will include estimates and other forelooking information, which our actual results may differ from in the future. I will invite you to review the questionnaire language in yesterday's earnings release and in our MD&E. regarding the various factors, assumptions, and risks that could cause our actual results to differ. With that, let me turn it over to Souj.

Thank you, Matan, and good morning. Before we start, I would like to quickly talk about our addition to the S&P TSX Small Cap Index back in September. We are happy with the inclusion. Moreover, we are happy to announce that all the assets from XG Science have been transferred to us and we have started the integration of the assets and customers of XG. Now moving to our Q1 result. Despite being in a tough macro environment, we are satisfied with the performance of our business. Our revenues from customers grew 52% and our gross margin continues to expand on a year-on-year basis based on better graphene enhanced products. Having said that, Supply chain challenges reduced our total expected revenue for this quarter, and company-wide wage increase that we applied on July 1st reduced our gross margin. We anticipate to offset the negative impact of supply chain disruption and wage increase with higher graphene sales as our graphene commercialization efforts continue. As you have probably seen last night, we unveiled our five-year strategic plan. Following a long and extensive review of our operations, top-down market analysis, and commercialization potential, the new strategic plan lays out a path to accelerated growth in the next five years. Our strategy is to narrow the scope of our funnel and focus on highest probability of success and high-volume graphene powder applications. By doing so, we will reduce our sales cycle time and increase our return on investment. By leveraging our proven formula and to further extend our market leading position, we're announcing a significant increase in our graphene and battery material production capacity, reaching 20,000 tons per year by 2027 from 4,000 tons currently, which represents a fivefold increase. Additionally, as part of the investment, We will invest in a 10 million pound graphene-enhanced sheet molding compound, or SMC, facility to capture the large and growing $3 billion SMC market, which targets light-weighting solutions. Accordingly, we plan to invest $170 million over the next five years. Our focus will be on battery materials, light-weighting composites, and specialty compounds and markets. Based on these investments, we believe that we are well positioned and will actively participate in the energy transition and sustainability megatrends for the next decade. As we go forward, our three growth pillars will be as follows. First, NanoExport will invest in a 12,000 ton per year graphene and battery material facility to address the growing lithium ion battery market. The plant will be in Montreal and will also include a 100 to 200 ton per year graphene-silicon performance additive line. We intend to lease a 200,000 square foot building in 2023 and commission our graphene-silicon performance additive line first, followed by our 12,000 ton per year graphene and battery material line in 2025. The output of this facility will serve the battery materials market and also serve graphene needs for our third growth pillar, which is a specialty compound. Furthermore, within the next few months, we will add a dedicated R&D facility in a different location to focus on anodes for next-generation battery technology, such as solid-state batteries and sodium ion batteries. Our three key product offerings will be anode-active materials, anode performance additive using our graphene-silicon solution, and anode conductive additive for catalysts. We believe that our valid material presents superior technical performance versus current solutions and are highly cost competitive. Furthermore, our top-down analysis also gives us strong conviction in our project. We believe that North American anode active material market will grow significantly in the next few years will continue to be in an undersupplied situation for a long time. Demand, especially after the Inflation Reduction Act, will further outstrip supply of the battery materials and provide an ample opportunity for local suppliers of battery materials to flourish. Moving to our second pillar, following the successful introduction of graphene into current SMC products, Nanoexplore will invest in a 10 million pound graphene SMC press facility. which represents five additional presses and will bring our total capacity to 12 million pounds. We intend to start construction in 2023 with an extension to our current site in Newton, North Carolina, and commission it by 2025. SMC is up-and-coming material for lightweighting components. For major OEMs, lightweighting solution is paramount, as it is intended to lower the weight of vehicles. For internal combustion engines or ICE vehicles, the need to lower the weight is important to able to achieve CO2 reduction targets. And for EVs, the reduction is crucial to improve battery performance as they are generally heavier than ICE vehicles. We have seen strong OEM interest for our graphene black SMC solution as it reduces parts weight by up to 25%. lowers paint cost because of its smooth surface, it is more sustainable, and reduces emissions. Moving to our third pillar, specialty compounds have an effective growth potential, particularly in polyurethane and concrete applications. We're continuing our development effort and anticipate reaching max capacity of our current graphene facility by 2024. and start supplying customers mainly in concrete markets from our new 12,000 ton per year facility in 2025. Furthermore, we will add another 4,000 ton per year graphene production module to existing facilities by 2026. This should bring the total production capacity to 20,000 ton per year in two facilities. Now, I will pass the line to Pedro to discuss our CAPEX in more detail and our financial performance.

Thank you, Soroush, and good morning to everyone on the call. I will begin with some information related to the five-year strategic plan, followed by some commentary on our Q1 results. As Soroush mentioned, our strategic plan will require an investment of $170 million, and with most of it over the next 24 to 36 months. Successful execution of our plan has the potential to generate over $100 million in annual battery material sales $80 million in additional annual graphene-enhanced SMC parts sales, and $40 million in additional annual graphene sales with internal rate of returns above 25% across each of the three pillars and start producing significant profits by 2025. By investing in these three main areas, our goal remains, out of the four, to stimulate the adoption of graphene, which in turn will provide substantial returns for our shareholders. Our plan will be financed through a combination of cash on hand, government grants that we expect to obtain, debt issuance, and equity if needed. The breakdown will depend on the conditions at the time of financing and will have the goal of achieving maximum shareholder value creation. Turning to our Q1 results, Our total revenues grew 45% to $27.2 million, but our revenues from customers actually grew 52%. The increase in revenue was driven by a combination of positive product mix, including graphene-enhanced products, the acquisition of Canuck in December 2021, and price increases but offset by lower tooling revenues. Tooling revenues will fluctuate based on customer needs for new molds, and this represented $1 million less than in Q1 2022. Our Q1 gross margin, excluding depreciation and amortization, was $3.2 million, an increase of $2.6 million compared to last year. As a percentage of sales, gross margins improved by 860 basis points to 11.6%, which was driven by a higher margin product mix, better pricing, improved productivity, and better cost controls. Our adjusted EBITDA was minus $2 million, which is still an improvement of $1.8 million versus last year. This improvement was due to higher growth margins partially offset by additional headcounts, higher wages, and higher accrued variable compensation. Despite great improvement in our results year-on-year for both revenues and EBITDA, the quarter was weaker than Q4 2022. Revenues are generally weaker in Q1, but we're also negatively impacted by lower tooling revenues, by a temporary shutdown at one of our customers, and supply chain constraints at others, limiting their capability to take product from us. Lower revenues, along with higher manufacturing costs, higher wages, and variable compensation accruals, and the addition of new positions to support our growth resulted in lower EBITDA. In the quarter, the U.S. dollar strengthened significantly against most of the world's currencies, including the Canadian dollar. Between June 30 and September 30, 2022, the U.S. dollar strengthened from 1.29 Canadian to 1.38. As part of our foreign exchange hedging policy, we engage in forward contracts up to 24 months based on expected U.S. dollar sales during the time period and record the monthly mark-to-market impact to the P&L. In Q1 2023, this caused a paper loss of $2.6 million due to this spike. It is important to understand that this amount does not account for future profits that would occur if the Canadian dollar remained at this rate, which would lessen this loss. In addition, since the Canadian dollar has strengthened since September 30th, and if it remains at current levels or continues strengthening, an important foreign exchange gain will result in Q2. With regards to our balance sheet, we ended the quarter with $42.8 million of cash and cash equivalent and $6.3 million of available space on our credit line for a total liquidity of $49.1 million. The main decrease versus June 30th was due to the acquisition of XG Sciences Assets, which reduced our cash by $3.9 million. Our total debt stood at $14.9 million and was comprised of $9 million of long-term and $5.9 million of short-term debt. Finally, considering the macroeconomic backdrop and to be conservative, we expect total revenues for fiscal year 2023 to be $110 million. With that, I will pass it back to Soroosh for some final comments.

Thank you, Pedro. To summarize, I'm excited about how our graphene commercialization efforts are progressing. and believe the graphene market will experience a significant growth in the next few years, and we are very well placed to benefit from this. I believe seeding the market through a vertical integration, both organically and inorganically, coupled with large volume and low-cost production is a winning business model, not only for graphene companies, but also for any advanced material, and I'm glad that we're approving this business model.

Next is Arush. For the Q&A, for this time only, we will limit to one question per participant. Operator, we can now open the line for questions.

Thank you. As a reminder, to ask a question, you'll need to press star one one on your phone. Please limit yourself to one question. And stand by as we compile the Q&A roster. One moment, please, for our first question. Our first question will come from Amir Ezzat of Echelon Partners. Your line is open.

Thanks for taking my question. I'll try to be choosy with my question. I'll ask you a two-part question on the financing. So how much of the $170 million in capital do you need in the next year in broad terms? Can you speak so soon about how much grants you are hoping to get from provincial and federal government?

Good morning, Amr. So it's a bit early to discuss that. We're expecting potentially between $50 million to $60 million of that to come from grants, but it really depends on next year or towards the third quarter when we look at that. a bit more carefully, but that's the initial expectation.

If you'll just allow me a clarification, Pedro, you also said equity, if needed, is the implied message here that you guys can execute on this without equity?

The short answer is yes. We're only going to look at equity if we fall short in getting the funds that we need to cover all the investments and the timing of the investments. But it will definitely be in the cards, but only really if that's needed.

Fantastic. I'll pass the line.

Thank you. One moment, please, for our next question.

Our next question will come from Michael Glenn of Raymond James. Your line is open.

Hey, so just in terms of EBITDA, you had the slightly positive EBITDA in Q4. I'm just trying to understand, is there a view at the company regarding a transition to positive EBITDA? Any outlook there? Is it a Is it a big goal to generate positive EBITDA as you execute on this plan?

So in general, our Q1 results are always slower than the Q4. So we always see this trend of first quarter to be slower. That by itself will impact lower EBITDA. Having said that, the target for us is in the next couple of years to sell more graphene and more graphene-enhanced products. That by itself impacts the growth of EBITDA. But we're not going to really reduce our cost, cut our R&D expenditure to get to EBITDA positive. I think that's not what we are doing here. We are focused on the growth. and we will continue focusing and investing on the initiatives to grow the sales of the graphene. In the next couple of years, especially after the strategy plan, we expect a significant growth of our EBITDA as a result of selling more graphene, and that's a higher margin part of our business. So inherently, as we sell more graphene, our EBITDA grows, but we're not going to reduce expenditure to show short-term positive EBITDA. I don't think that's what our shareholders also want.

Okay. And just make sure I heard properly, of the 170 million, 50 to 60 million is anticipated to come from grants? Yes. Okay. Thank you. Sure.

Thank you. One moment, please, for our next question. Our next question will come from Macmurray Whale of Cormac Securities, Inc. Your line is open.

Hi, this is a little unconventional. It's Rupert Merritt from National Bank here. I have some technical difficulties this morning, so I'm relying on the generosity of Mac here. In your prepared remarks, you highlighted that one of the goals of the strategic plan is to stimulate demand for graphene-based materials. I'm just wondering how much input from customers do you have in this process? Do you have visibility on demand from your customers? Will they be ramping up capabilities in parallel as you build out your capabilities?

Yes, definitely on the S&C part, we have already received the interest from different OEMs for our product. On the battery material part, at least on the first part of that, you have quite a lot better visibility on the customers, and a big chunk of that, I don't want to say is spoken for, but we have clarity of where the product is going. Of course, as we go toward the end of the five years, it will be less of a visibility, but we have a decent sales funnel that's growing with multiple clients, so we are counting on them increasing their uptake of graphene, too.

Great. Thank you.

Thank you. And speakers, I'm seeing no further questions in the queue.

Merci, opérateur. Nous voudrions vous remercier d'avoir participé à cet appel et nous vous souhaitons une excellente journée. I would like to thank everyone for attending this call and we wish you a great day. You can now disconnect.

This concludes today's conference call. Thank you all for participating. You may disconnect and have a pleasant day.