NanoXplore Inc.

Good day and thank you for standing by. Welcome to the Q2 2023 NanoExplore earnings conference call. At this time, all participants are on the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Martin Gagné, Director of Investor Relations.

Please go ahead. Good morning, everyone, and welcome to Nano Explore's fiscal 2023 second quarter conference call. Today, I'm here with Surush Nazarpur, our President and CEO, and Pedro Azevedo, our CFO. We will start with our prepared remarks and then a Q&A. Please note that our discussion will include estimates and other forward-looking information, which our actual results may differ from in the future. We invite you to review the cautionary 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 Soroush.

Thank you, my friends. Good morning, everyone, and thank you for joining us today. Before we start, I would like to explain the reason for the early financial release. The last few minutes of trading on Monday afternoon, it came to our attention that a copy of our press release had become visible to some individuals with no intention on our part. In order to ensure all market participants have access to the same information at the same time, We chose to pull up the release the Tuesday morning before market opened. We followed all the regulatory protocols in learning of this information and followed IROC guidances for early release. I would like to thank all of our team members across our organization for their hard work and dedication. I'm grateful to everyone for being on this journey with us. I will start our prepared remarks with the impact of macroeconomics environment on our business, followed by a quick financial review of our second quarter. Then I'm going to expand on some of recent achievements and will report on the progress of our five-year strategy plan. I will end my remarks with some comments on Volta Explore. Let's begin with a macro overview. Despite hearing about a potential recession from economics in 2023, We believe some segments of economy can withstand a slowdown much better than the others. We currently do not see an impact from this Fed-induced economic slowdown to our business, and in fact, we are not seeing our partners slowing their graphene testing and validation process or planning to. There are two main reasons for this. First, the macroeconomic picture has limited impact on commercialization of graphene. As it is a nascent market and early adopters are generally market leaders, that can withstand the potential slowdown better. And second, heavy commercial transportation market, which represents almost half of our revenue, is recovering well and the fundamentals are improving as cheap shortage has been and supply chain challenges are abating. In fact, our main customers are increasing their production forecast. To summarize, we do not see a slowdown in our business, and we feel very good about where we're headed. Moving to our second quarter, we delivered a strong top-line growth and significant margin expansion. Total revenue grew 69% year-on-year to $31.7 million in the second quarter, which is a record level. And we delivered positive adjusted EBITDA for the second time in the last three quarters. Overall, we're quite satisfied with our graphene commercialization activities, as we see more and more successful customer trials. Our decision last year to focus on applications with higher probability of success was the right one, and we believe this will increase our return on R&D initiatives and speed up commercialization efforts. Let's just start with our transportation business. We are thrilled that one of our large commercial vehicle OEM customers approved the use of graphene to all current and potential future programs. The decision resulted from successful integration of our graphene in an existing program where our customer observed significant improvement in the quality of our composite products. Such decisions are rare in such a conservative market and will set the tone for other OEMs to follow along. This, in turn, results into more integration of our graphene in lightweight composite markets. In addition, just recently we got the approval directly from a large passenger OEM for graphene-enhanced plastics for exterior automotive applications. This well-known passenger OEM is an early adopter of graphene and has already certified our graphene and is using our graphene in its vehicles. The key benefit of adding our graphene to these applications is that it improves moisture resistance. This results into better material processability and less defective parts. This approval would have not been possible without our downstream acquisition of Canuck late in December 2021 and demonstrates our ability to expand our commercial activities with an existing client. Graphene market encountered with one-off products for a long time, and we're happy that our graphene is bringing tangible and sustainable value to our customers and enabling us to win more business with an existing platform. Moving to drilling fluid, One of our partners, which is a market leader in specialized drilling fluid applications, is showing that our graphene helped them with fluid loss mitigations and brought high thermal stability at very high temperatures, which speeds up the drilling process. Currently, they are setting us up as a vendor in the ERP system, and commercial discussion is ongoing. This vertical is especially attractive as it is a large and consumable market with significant loading potential of our graphene black powder. Just to give you some context, this vertical has a potential PAM of 256,000 tons of graphene. Turning to foam, several chemical companies that we are working with are seeing very positive performance with our graphene black solutions. We are involved in 30 technical validation programs, and we are seeing success in the majority of them. Based on these very good results, we're confident that our graphene integration will grow in this market. Graphene increases the thermal insulation properties by 10% to 15%, improves flame retardancy, and provides a more sustainable solution. We're also currently working with a well-known multinational chemical company in a late-stage trial, and results show that the combination of performance, cost, make graphene very attractive for insulation foam applications. The weather performance is driven by improved mechanical properties and enhanced weather ability. The partner will do further field trials, but based on these excellent results, we are confident that we can win this business and grow from there. Recall that this is a large market with potential time of 190,000 tons of graphene. In concrete, we're also receiving some very good outcomes. As an example, we're engaged with a major concrete manufacturer whose interest in our graphene black is high. We have been testing with this partner and saw a 20% improvement in compressive strength using their scalable formulation. Even though more work is required, these impressive results are very promising for our company. Remember, this is the largest total eligible market for graphene, equating to 6 million tons of annual consumption. Even a small market share would be significant for us. Another example is our ongoing development work with one of the market leaders in the cement additive market that achieved elevated mechanical properties after adding graphene to concrete admixture. Currently, they're moving forward with further field trials and with their own customers and championing the ASTM product certification effort. Certification process in cement markets cumbersome and long, having said that, this process can be accelerated significantly when a market leader is championing it. As we think long-term, Nanoexplore is keeping sustainability top of mind. We firmly believe that reducing the carbon footprint should be ingrained throughout the corporate sector and their respective supply chain. As we said in the past, our graphene black solution has an 80% lower carbon footprint than competing solutions, and customers are very interested in learning more. using more recycled plastics to definitely help lower GHG, but weak performance of such recycled materials hinders the vital spread use. According to a research paper from the Imperial College in London, recycling saves between 30% and 80% of carbon emissions versus virgin plastics, or equivalent to shutting down between 8 and 40 coal-fired power plants globally if all plastics were recycled. As noted before, graphene enables the usability of plastics by enhancing their rigidity and performance. As an example, we're supplying graphene to a sustainable packaging company from Latin America, and we're expecting more of such type of customers to use graphene commercially. Moving to our five-year plans, we're a conservative company, and the five-year plan we have announced is in line with this. Although early in the process, we have a strong conviction in our strategic initiatives, and the potential for our graphene consumption. Let's start with our SMC initiative. We are currently conducting our detailed engineering work and started discussion and negotiation with long lead item equipment suppliers. Despite being at this early stage, we are confident that we can optimize our capex investment related to main equipment. We are targeting September 23 for the start of procurement, which is on time according to our schedule. and the commissioning should be early calendar year 2025. We are targeting to finance this through credit facility and cash on hand. Light weighting will be a key theme for electrification of transport, and Nano Explorer is in a desirable position. Our solution can lower parts weight by up to 25%. It prevents the surface from blistering, thus creating a high quality and smooth surface finish, leading to lower paint cost. The reduction in consumed material reduces carbon emission and helps on the sustainability front. In addition to this, our SMC solution will improve key properties in battery enclosures for EVs. The overall battery-packed components are the heaviest part of the EV at around 30% of the vehicle weight. Battery enclosures are made of metal, but it is clear to us that by using composites coupled with our graphene SMC proprietary product, we can solve the weight problem for OEMs, which increases EV rates. This market is very attractive, not only because of the rapid rise in EV markets, but also because of high loading of graphene, which is around five times more than average loading in other composite applications. All in all, we're confident about the potential of our company in this growing SMC market. Moving to our graphene and battery material facility. The engineering work has started and we are looking for a suitable building to house our production lines. The facility will have a capacity of 12,000 tons per year consisting of 7,000 tons of anode battery materials and 5,000 tons of our industrial graphene products. As we said in the past, we will sell three types of battery material solutions to the energy storage market and to Volta Explorer as well. The three solutions are anode active material, and a performance additive consisting of our graphene-silicon solutions. And finally, we have our conductive additive products. We expect to commission our 100- to 200-ton-per-year graphene-silicon performance additive lines during 2023 by benefiting from XG's acquired assets and commission the rest by 2025. As noted before, we are very excited to enter into battery material markets. This market is expecting a strong pull as supply is limited and localized mainly in Asia. Since the Inflation Reduction Act was enacted last year, we have seen multiple new battery projects on the drawing table. The overall battery manufacturing capacity planned has increased from roughly 700 GWh to 1,000 GWh in North America by 2031, according to BMI, which makes the market dynamic very enticing for nanoexplored battery material solutions. As for our battery material, new R&D facility, which we announced after the XG acquisition, we're currently setting up the equipment and anticipating to have it up and running in a few weeks. The required lab equipment from XG, along with their important graph in silicon patterns, are key for our performance additive products. and more development will be undergoing in our new lab space. Switching gears to VoltaXplore. We have been working hard behind the scenes on the development side. First, we're improving and adding hours of testing, which is very important for optimizing the performance of these cells. As previously disclosed in our AGM presentation, which is in our website, the KPIs are impressive. Volta has a high energy density. It provides lower cell temperature, which results into safer batteries and are lighter in comparison to our competitors' products. As we put these lighter cells in a battery pack with thousands of them, it's going to make a difference in increasing the vehicle range and safety. Moreover, we are excited to have been selected to be a part of the Project Arrow. The unveiling of the car was very well received at the Consumer Electronics Show, in early January, and the Volta team was there to meet with interested parties. I want to reiterate that Volta Explore is a top priority for NanoExplore, and our desire to succeed has never been higher. We're confident about the prospect of Volta Explore because of the strong performance that our sales bring, along with the discussion we are having with the stakeholders and future customers. I will refrain from commenting further at this point on these discussions or on financing activities for obvious reasons. What I can say is that we are still committed to building a gigafactory in Quebec and are actively working to make this a reality. Moreover, the 2023 upcoming federal budget has the potential to be an important contributor to this project, and we hope to see programs that can compete with the Inflation Reduction Act in use. Finally, I would like to welcome Darren Hotz to the NanoExpro family as our new Vice President of Sales and Business Development for our Graphene Enhanced Composite Business and Battery Enclosure. Darren brings extensive experience in the auto sector and has worked with Tier 1 global OEMs throughout his career. With that, I will pass the line to Pedro.