NanoXplore Inc.

Good day and thank you for standing by. Welcome to the second quarter 2025 NanoExplorer 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 the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Pierre Therese, VP of Corporate Development. Please go ahead.

Bonjour à tous et bienvenue à la conférence téléphonique du deuxième trimestre 2025 de NanoExplore. Good morning, everyone, and thank you for joining this discussion of NanoExplore financial and operating results for the second quarter of fiscal 2025. The press release reporting these results was published yesterday after market close and can also be found on our website along with our financial statements and MD&E. These documents are also available on Cedar Plus. Before we begin, I'd like to remind you that today's remark, including management's outlook and answer to questions, contains forward-looking statements. These forward-looking statements represent our expectation as of today, February 12, 2025, and accordingly are subject to change. Such statements are based on assumptions that may not materialize and are subject to risk and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risk factors that may affect future results is contained in NanoExport Annual Information Forum, available on our corporate website and in our filings with the Canadian Securities Administrator on CEDAR+. On the call with me this morning, we have Soroush Nazarpo, NanoExport Chief Executive Officer, and Pedro Azevedo, our Chief Financial Officer. After remarks from Soroush and Pedro, we'll open the call to questions from financial analysts. Let me turn the call over to Soroush.

Thank you, PY, and good morning to everyone joining us on the call. I will first start with the review of the economy, more specifically tariffs and the impact on our business. I will then expand on our CSBG expansion and dryer process graphene plan, followed by our graphene sales activities, and end my remarks with an update on our capital allocation plan. From a macro perspective, the previously announced tariffs, followed by 30 days pause until early March, is creating uncertainty in the near term and contributing to an unstable operating environment. We're monitoring the situation very closely and will take action if necessary in due course. The threat of tariff itself is already impacting North American supply chain by pushing companies to rethink sourcing and production strategies. Some trends like reshoring, supplier diversification, and vertical integration are top priorities now. In my opinion, while short-term disruptions are inevitable, long-term implications are sector-specific. Such tariffs are very disruptive to the transportation market, and price increases will be transferred to the end users. Related to our plastic business, raw material is mostly purchased from U.S. and sold back to United States. Based on available information, it seems that there would be no tariff impact. To conclude, tariffs, while disruptive in the short term, are unlikely to have lasting negative impact on our business. Moving to our result, the increased activities from our customers resulted in a constructive second quarter performance, and I'm happy to report another quarter of double-digit organic growth coupled to the 10th consecutive quarter of margin expansion. Regarding our expansion for CSPG and dry process graphene, we are still waiting confirmation from Hydro-Quebec on the allocation of an additional 2 MW of electricity for our project. Request has been submitted around 18 months ago and we have received verbal confirmation already. Our expectation is to receive the official document in the next few weeks. Aside from that, we continued our activities with related stakeholders such as our construction partner and First Nation groups. As of today, everything is in place to start the build-out of the new plant this spring. The dynamics of the North American CSBG market haven't changed, and the supply deficit is persistent and could only be intensified by tariffs on Chinese imports. As it relates to our dry process graphene, production at the company's Montreal facility has been ongoing since July 2024, with sample shipments already delivered to customers targeting a wide range of applications, including composite materials, batteries, packaging, insulating foams, and more. Early customer feedback has been consistently positive. particularly regarding the new cost structure of the dry process graphene. This competitive pricing has accelerated customer testing and decision-making processes, generating significant enthusiasm. To meet growing demand of dry process graphene and build on this momentum, the company's technical team is preparing for a scale-up in production. The engineering team is finalizing plans for a large-scale pilot plant with purchase orders for major equipment expected within the next month. The centerpiece of this expansion will be a new exfoliation mill, anticipated to arrive by the third quarter of the current year. This new equipment will increase pilot production capacity significantly. Once the new equipment is installed and commissioned by the end of calendar year 2025, The company anticipate producing hundreds of tons of dry process graphene powder from the expanded pilot line. This will serve as a precursor for the construction of a multi-thousand ton facility, as outlined in the company's five-year strategic plan. The increased capacity will enable NanoExplore to serve a broader customer base, further penetrate key markets, and accelerate adoption ahead of the full-scale facility's completion. This is a major step forward for us and for the commercialization of dry process graphene. We believe our patented dry process graphene will unlock new market opportunities, particularly as a replacement for other carbon-based additives, since pricing will not be a barrier for prospective clients. Time to market and sales cycles should therefore be shortened. In respect to our direct graphene powder and master batch sales, Validation and testing activities are ongoing. Regarding our customers in drilling fluid and insulation foam, test results have been promising and trials are still in progress. Our drilling fluid customer is undergoing weld tests in various locations in the United States and we expect this process to continue until mid-calendar year 2025 and commercial rollout to start in the second half of calendar year 2025. As it relates to our insulation foam customer, final plant verification will be ongoing for another 90 days. Following the completion of the testing phase, we expect to move to commercial rollout in the second half of this year. Both these products are pillars of our future growth, and winning these businesses will materially impact the future of NanoExplore and graphene market as a whole. We have spent years of development with our Fortune 500 partners and hope to conclude our commercial introduction this year. For our graphene-enhanced composite products, overall demand continues to be strong, but delays in the new program launch combined with the uncertainty created by the potential tariff translate into potential softer near-term demand environment. Having said that, We continue to drive forward with investment in new equipment and will continue to invest more as a part of our five-year strategic plan. A large part of these investments will be in the United States and are supported by booked contracts with existing and new customers. As a matter of fact, our expansion in North Carolina progressed well, with equipment expected to arrive in early summertime frame and revenues to pick up by early fall. With that, I'll now turn the call over to Pedro, who will provide details about our financial performance. Pedro?

Merci, Sourouche. Bonjour à tous. Good morning, everyone. Today, I will begin with a review of our Q2, followed by an update on progress of our five-year plan and conclude with some commentary on near-term CAPEX spending and guidance for fiscal year 2025. But before the review of Q2, some housekeeping. During the quarter, and to reflect the evolution in our business, we have renamed the battery cell segment to be battery cells and materials. This segment will incorporate not just the Volt Explorer initiative of cells, but the expansion into battery materials as well going forward. Total revenues in Q2 were 14% higher than Q2 last year at $33.1 million and was mainly attributable to an increase on progress revenue recognition on new tooling being manufactured for three different customers. Tooling revenues will continue to be higher than normal during fiscal year 2025 due to the previously announced expansion of an existing program and the launch of two new programs. Once the tooling for these programs is completed, part revenues will increase with the additional capacity and with new programs starting production. Adjusted gross margins as a percentage of sales continued to increase year over year and were 21.3% during the quarter. an increase of 190 basis points, and were driven by improved productivity resulting in part from the manufacturing cost benefits of producing graphene-enhanced products and various manufacturing efficiency improvement initiatives. This year-over-year margin improvement has been a trend over the last 10 quarters, and we are pleased that it is continuing. As a reminder to our shareholders and analysts, As the proportion of sales of graphene powder and graphene-enhanced materials increases, gross margins as a percentage of sales will also increase. Adjusted EBITDA was $1.1 million versus a loss of $93,000 last year. Looking at our segments, adjusted EBITDA was $1.3 million in the advanced materials, plastics, and composite product segment compared to $416,000 last year, and an adjusted EBITDA loss of $218,000 in the battery cells and materials segment compared to a loss of $509,000 last year. Volta Explore expenditures during the quarter were lower mainly due to a reduction in spending on external consultants related to battery cells and a refocus on silicon graphene battery materials. In addition, Volta Explore staff is providing support for our research grant and will further reduce the EBITDA loss in the battery cells and materials segment in the near term. With regard to our balance sheet and cash flows, we ended the quarter with $21 million in cash and cash equivalent and $6.4 million in operating loans and long-term debt. Operating cash flows amounted to an inflow of $1.5 million due to a reduction of non-cash working capital. Cash flows from financing activities were an outflow of just $100,000 and included proceeds of $1.7 million of equipment lease financing related to our U.S. expansion, offset by repayments of lease liabilities and long-term debt. Cash flows from investing activities were an outflow of $1.9 million, mainly related to capital expenditure payments related to the U.S. and Canadian plant expansions. Our cash, along with the unused space of our revolving credit line, resulted in a total liquidity of $31 million at December 31st, which was similar to September 30th. Moving now to an update on financial aspects of our five-year strategic plan. Regarding the expansion of graphene-enhanced SMC capacity, expansion of our Sainte-Claude-de-Beau plant is in its last phase. Construction of the extension was completed in December, and the new press and tooling are in transit and will be operational towards the end of this quarter. We expect incremental production will start in fiscal Q4. Our U.S. expansion, which includes both graphene-enhanced SMC as well as additional capacity for the composites business, is also underway, with most of the equipment having been ordered. Since the last quarterly call, we have chosen a site in Statesville, North Carolina, about 30 minutes from our Newton, North Carolina plant, and are in the process of finalizing lease terms. We expect to sign a lease by the end of February. With various equipment expected to be delivered during fiscal Q4 2025, we expect production to start during the summer of 2025, adding incremental revenues. In light of recent events related to tariffs, an increase in our U.S. manufacturing capacity has turned out to be a good decision and will lessen the impact of tariffs in the future should they occur. As the Battery Materials Initiative due diligence process is ongoing, with both levels of government, the main remaining factor in the process is the written confirmation from Hydro-Quebec that we will obtain the additional 2 MW required for the project to move forward This confirmation is expected before the end of March 2025. Turning now to our near-term capex spending and fiscal year 2025 guidance. Given the current U.S. and Canadian expansion initiatives and low Q2 capex spending due to timing of progressive payments to suppliers for ordered equipment, we expect capex spending to be 2 to 3 million in Q3 and 4 to 5 million in the following two quarters, but then reduced thereafter to 1 to 2 million. The majority of this spending will be financed through equipment lease financing when equipment is operational. This capex spending amount does not include spending on the dry process graphene and anode battery materials initiative, but will be updated once the financing for the battery material initiative is finalized. Finally, with regard to fiscal year 2025 guidance, While some parts of our business are growing as expected, the increase in volumes expected from our two largest customers on both existing and from the start of new programs are still not occurring. The main contributor to this are market demand for medium-duty trucks remaining flat and supply chain challenges by our customer in the launch of a new truck causing delays in the start of production. In addition, with the uncertainties created by the possibility of tariffs since the US election, And more concretely, with the events of last week and the 30 days grace still in the background, we believe the near-term economic environment may be softening. At this time, we maintain our guidance of $140 to $155 million, but expect to be on the lower end of this range. We will provide an update during our Q3 call as the visibility improves. With that, I will pass it back to Pierre-Yves.

Thank you, operator. We can now open the lines for questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from James McGarrigle of RBC. The line is open.

Hey, good morning, guys. Thanks for having me on.

Good morning, James.

I just had a question on the gross margin expansion in the quarter. You know, anything specific to flag in that number? Any, you know, one-time things that helped out margin in the quarter? Just trying to understand how we should be thinking about margins during the rest of the year, especially given some of the volume headwinds that you'd slide in your updated outlook?

No, there's nothing particular coming into Q2, and I think that Q3 and Q4 should be at the same kind of path of year-over-year improvement. Q2 to Q2 is a bigger improvement than I would normally have expected, but Q3 should be a little bit softer versus last year.

Perfect. I appreciate that. When I look into the fiscal 2026, consensus is quite wide-ranging, calling for significant top-line growth, 30%, and an EBITDA of $20 million, which implies some pretty meaningful margin expansion. I'm not asking for a 2026 guide, but any color that you can share on how we should think about modeling fiscal 2026?

At this time, it's too early for those kind of conclusions. We're trying to see how Q3 and Q4 ends up. Fiscal year 26, we do see a lot of new business coming online. A lot of the initiatives that have been put in place the last two years have been a lot of investment. So we expect fiscal 2026 to be more robust than in the last couple of years. But I can't give you any guidance right now for that.

No, I appreciate that. And I'll turn the line over. Thank you.

Thanks.

Thank you. Our next question comes from Amar Asat of Bentham Capital Markets. Your line is open.

Sir, this is Pedro Pui. Good morning. Good morning. Just a couple of questions. First, on guidance, you mentioned You know, like the guidance coming at the low end of the range, which I guess isn't surprising for anybody given the macro headwinds, but I just wonder, like, how confident are you guys in hitting that low end, or should we think of this as more of a moving target given the macro uncertainty? I'm wondering why not just give a new range instead of staying, like, low ends.

So I guess the first thing is there's a lot of uncertainty at this point. We want to see how things are evolving with the tariffs, and that's going to have a material impact on everyone's business if there's a blanket 25% tariff. There's a little bit of a wait-and-see about tariff, and I think the third quarter we would have a lot better visibility to comment on the range.

Okay. I guess it's very hard to give color beyond that for everybody. So, you know, like, could we see a scenario where a greater portion of your five-year business plan and expansion shifts to North Carolina rather than Quebec? Or is that too extreme a scenario to consider at this stage?

I would say that at this point, we don't see such a drastic change to the five-year plan. But of course, the tariffs are going to be very meaningful if those type of blanket tariffs come into effect. And that will potentially force us to rethink our five-year strategy plan. But at this point, it's unlikely that we will have such tariffs coming in. So I would say no at this point.

Okay, but you still retain some flexibility, I guess? 100%. Okay, that's good to know. Then did I hear you guys correctly? Did you guys say commercial rollout for the graphene powder for fluid and foam clients in the second half of the year? Yes, that's what we said. Are you guys commenting at all on the magnitudes, I guess, of these commercial rollouts?

Hard to say, but at this point, the initial feedbacks were seen potentially at hundreds of tons to start with and moving to thousands of tons in a couple of years, but very hard for me to pinpoint exact numbers at this point.

Okay. I didn't work out the math, but You know, like if I were to take everything together, so, you know, like you're saying for revenues, low end of the guidance, which you are now targeting, it's about 5% lower than the midpoint, I guess, that you previously had. Then you've got, in the same time, the commercial rollout for graphene powder, which, as we know, is like much higher margins. So should we interpret this as, okay, maybe lower revenue expectations but some margin insulation, i.e., you know, like not as much like impact on your goals, profits, and EBITDA. Is that like a fair assessment?

A couple points. Our fiscal year is junior year, so you've got to consider that second half is going to be pushed into the next fiscal year. That's one point. Okay.

So, sorry, second half is 2025? Yes. Okay.

Okay. But for the margins, yes. The revenue coming from this new business that will start up in the second half of the calendar year will have some revenue impact for sure, obviously, but it's more the margins that will be more visible because, as you said, the margins are greater and a lot of the absorption of fixed overheads that we have today will be flowing to the revenue will be flowing directly to the bottom line.

Fantastic. Then just on the CSBG, Soroush, your comments were pretty, you know, like confidence in that the North American market remains in a supply deficit. And there's no real change in demand, despite slowing EV sales. Can you maybe give us like a refresher or walk us through these key dynamics?

So a couple of internal analysis that we did, we believe somewhere around 60,000 tons of CSBGs is bought annually in North America now. And I think that the total production of CSBG in North America today is slightly below 10,000 tons or 12,000 tons. So already you're seeing about 80% of capacity coming from China. So all those tariffs coming in place for Chinese CSBG supply. and assuming even no growth in EV, I think there is still north of 45,000 to 50,000 tons of CSPG needed for North America at this point without any growth.

Well, it seems to suggest even if we're going into decline, which we're not, that there's still demand for CSPG in a declining EV market. Is that fair?

Yeah, but the AV market is not declining. A couple of the numbers that are out, it's growing, not at the speed that everyone hoped for, but still growing.

No, I understood. I meant in an extreme scenario. It seems like there's still demand for it, given how undersupplied, I guess, the markets are. Okay. Congrats on the quarter, and I'll pass the line.

Thank you. Thank you. Our next question comes from Rupert Morair of National Bank. Your line is open.

Hi, good morning, everyone. Thanks for taking the question.

Good morning, Rupert.

So, Sroosh, you've got two material investments you're looking to make fairly soon, the CSPG and your dry process graphene. I know you're waiting on the confirmation from Hydro-Québec for the power. Can you give us more color on what's happening with the funding agreements for those facilities and in particular the receipt of ITC's government support in Canada.

Yeah, so we are the last step for them and also for us is to get the power. We're unfortunately unable to start a project of this magnitude without having 100% clarity on the availability of power for this project. So we're waiting for the power confirmation to come in and start the production. We have, at this point, our understanding is we will receive this funding from the government, assuming the power is in place.

Okay, and the plan, I believe, is $120 million over a few years. How much of the of the capital have you received the financing for so far? In other words, have you got basic agreements in place for ITCs on just the initial portion or on the full investment at this point? And the second part of that question is if we do get a change of government here in Canada, is there any risk to that financing?

Yeah, so about 50% of the capital or maybe slightly higher is coming from all the government programs and supports. So that's the range that we are talking. Regarding the change of ITC, I think one of the main contributors here is how the US new government will deal with the IRA or Inflation Reduction Act. And I think ITC was somehow a competitor to the IRA. IRA looks to be downgraded, but it's not yet confirmed. So we're observing to see how that is evolving, and there's a chance that if there's a change of government in Canada, there might be also changes in the program. I think a little early to comment on those, but certainly we are observing.

Peter Andreea- And great and then Secondly, very high level question here we don't know what's going to happen with tariffs, but we do have tariffs on steel and aluminum already and i'm already seeing commentary on. Peter Andreea- A shift to composite materials and some industries to lower cost it. Wondering how you think that trend could fit into your business, if you have any conversations on lightweighting that could be accelerated by these tariffs.

Well, steel and aluminum tariffs are not in place yet. They're going to be in place. Let's say, assuming everything follows, which these days everything changes as things evolve. I would say change of... Some structural parts are not going to be that easy to convert from steel to a evaluation for the customers. So I don't see that trend, but some, I would say, non-critical parts could be replaced with composites, and that potentially will support our business. But I don't see transportation itself. You're just going to see a quick shift of metal to composites.

All right, very good. I'll leave it there. Thank you.

Thank you. And as a reminder, if you have a question, please press star 11 on your telephone. Our next question comes from Michael Glenn of Raymond James. Your line is open.

Hey, good morning. On the dry process graphene, can you remind us of the cost and pricing difference that will come with the dry process graphene versus... the existing graphene process?

Drive process is significantly lower selling price but also significantly lower cost so it's designed to be competitive with other type of carbon materials particularly carbon black on a one-on-one basis and carbon black is being offered $2.50 to $3.50 US per kilo pricing today. So this is technically where we are seeing we're going to offer this product. Cost is significantly lower, but we're expecting we can keep the margin that we have currently with our graphene and the dry process graphene as well.

And the new capacity that comes on with dry process will Will customers then switch away? I'm trying to understand if it's an incremental capacity add or there's some switching that will take place away from the legacy graphene process into the dry process.

So a couple of points. So one of them is we are expanding the existing pilot line that we have in our team and facility to add a few hundreds of tons of capacity of dry process graphene. So that's one thing. that comes as a precursor for the five-year plan, 8,000 tons new capacity that's coming for graphing, right? So that's one thing. The second is the applications are quite different. So what you call legacy graphing is functioning very well in a couple of applications, especially in the composite. We anticipate dry process. to cover markets that require lower selling price and lower cost. Not necessarily a lower performance, but lower or different, let's say, outputs of characteristics for the dry process graphene. The best example is, for instance, when you look at the barrier type properties, what you call legacy graphene is functioning better. But if you're looking at applications that requires UV properties, our dry processes are functioning better. So these are different characteristics and different applications.

Okay. And then within the battery segment, that will now include the battery materials. So are you able to provide some commentary surrounding like what I guess there will be a period of losses that come into that, so we should expect that losses within that segment will pick up for a period of time and then get smaller again as volumes ramp. Is that a logical assumption?

Yeah, so the losses will really only start when we start spending a lot of money related to the initiative, which is not in the next few months, but it will be probably in the 2026 year. We're also going to be able to capitalize some of the costs as part of the investment for the plant, so they won't flow to the bottom line as a loss, per se. I don't have the mechanics or the amounts, I should say, related to that, but you shouldn't expect also a lot of losses. Today, the losses that we see in the overall nano business is really coming from the graphene infrastructure costs that we have built, but we shouldn't see those things to the same extent in the battery materials segment. Volt Explorer, a lot of those costs went to the bottom line because we were running, but we didn't have a customer. So that didn't allow for capitalization of those costs. So I think you shouldn't expect too much losses to be flowing to the P&L, the bottom line, once we start the initiative.

Okay, and then last one, have there been any adjustments at all to graphite supply for NanoExplorer? Is it still coming from the same source, or have there been adjustments, and are you expecting any adjustments to where you're sourcing material from?

No, there hasn't been adjustments. I feel the graphite market is in oversupply. It continues to be in oversupply, so no changes on that side. Okay, thank you.

Thank you. Our next question comes from McMurray Whale of Cormark Securities, and your line is open.

Hi, good morning. Could you share with us, like, what percentage of sales that go to Canadian customers end up in products being sold through to the U.S. market?

Well, that's a hard question to answer simply because right now 75% of our business, give or take, goes to the U.S. or is generated in the U.S. So some of it is flowing to Canada but ultimately also going to the U.S. So the amount that is impacted by the U.S. possibility of tariffs and things of that nature is is greater than what we currently sell in U.S.

Okay. And can you remind us how was the selling price of that dry process material? Are you going out with trying to match a price of a product you're trying to displace? I'm wondering, you talked about the selling price being lower than the material you're making with the other process. Is that a quality issue, a purity issue, or is that just a strategy in penetrating the market?

It's a strategy in the way we are. What we're trying to do is when discussing with the client right from the start, they have the chance to replace the current carbon black material that they buy with the dry process graphene and right there they don't see any increase in the cost of in the bill of material so that the idea is to get all the benefits from the graphene but not to have any premium in terms of the cost for the customer okay that's that's helpful thanks that's all my questions thank you thanks

Thank you. I'm showing no further questions at this time. I'd like to turn it back to Pierre Therese for closing remarks.

Okay. Thank you, operator. We'd like to thank everyone for participating in this call and wish everyone a great day. Thank you very much.

This concludes today's conference call. Thank you for participating, and you may now disconnect.