NanoXplore Inc.

Thank you for standing by. Welcome to the NanoExplore Third Quarter Fiscal 2025 Earnings 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'll 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 hand the conference over to Pierre Therese, Vice President of Corporate Development.

Bonjour à tous et bienvenue à la conférence téléphonique du troisième trimestre 2025 de NanoExplore. Good morning everyone and thank you for joining the discussion of NanoExplore Financial and Operating Results for the Third Quarter of Fiscal 2025. The press release reporting this result was published yesterday after market closed and can also be found on our website along with our financial statements and MDNA. These documents are also available on CDOR+. Before we begin, I'd like to remind you that today's remarks, including management outlook and answer to questions, contain forward-looking statements. These forward-looking statements represent our expectation as of today, May 14, 2025, and are accordingly a 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, unless there are caution not to place undue reliance on these forward-looking statements. A description of the risk factor that may affect future results is contained in NanoExplore's annual information form, available on our corporate website and our filings with the Canadian Securities Administrator on CDOR+. On the call with me this morning, I have Sourouj Nazarpo, NanoExplore Chief Executive Officer and Pedro Azevedo, our Chief Financial Officer. After remarks from Sourouj and Pedro, we'll open the call to questions from financial analysts. Let me now turn the call over to Sourouj.

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 provide an update on our expansion plan, followed by our graphene sales activities, and end my remarks with an update on our capital allocation plan. From a macro perspective, the current US administration economic policies have had short-term disruptive effects on our customers and consequently on our business, which translated into an unstable operating environment. In short-term, we experienced delays in programs launched from existing customers and customers holding back orders. We believe the delayed programs will gradually resume between now and Q2 2026. Our expansion in North Carolina is progressing well, and as previously mentioned, it is supported by booked contracts with existing and new customers. Our third quarter represented a challenging macro environment, and consequently our revenue growth suffered. That being said, we executed well and our margins continued to increase, reflecting a greater acceptance of our graphene-enhanced solutions across industries. Regarding our expansion plan for CSBG and dry process graphene, we have received positive signals, but still awaiting official confirmation from Hydro-Québec on the allocation of 7 megawatt of electricity for our project. We met with Hydro-Québec to present the project and have been in contact with government officials regularly. Obviously, we are unable to start this project without having the required power and constant delays in the process have been frustrating. Currently, we are working on mitigating strategies and alternatives such as evaluating other jurisdictions or breaking the project into pieces. No decision has been made, but we are getting closer to such a decision. Aside from that, we continued our activities with related stakeholders such as our construction partner and First Nations groups. As mentioned before, the dynamics of North American CSBG markets haven't changed, and the supply deficit is persisting and could only be exacerbated by tariffs on Chinese imports. As it relates to our dry process graphene, I am pleased to report that we ordered the equipment needed to produce industrial volumes of dry process graphene within our team in this facility. The capacity of this module is between 500 to 1,000 tons per year. We anticipate receiving the equipment by end of calendar 2025 and start production in 2026. This module is one of the modules of the upcoming CSBG Dry Process Graphene Plant Facility. Setting up this production module enables us to supply larger volumes of dry process graphene to our testing partners. In respect to our direct graphene powder and master batch cells, validations and testing activities are ongoing. Regarding our customers in drilling fluid and insulation foam, results have continued to be promising. Our drilling fluid customer is undergoing more well tests in various locations in the US for both onshore and offshore drilling. Even though we expect these validations to continue, we have started supplying graphene to this customer and they are actively marketing this new lubricant in industry trade shows. As it relates to our insulation foam customer, we are almost done with all the testing, expecting to move to commercial rollout in the first plant of our customer during summer. This customer has several similar production facilities and we expect to roll out this product to other manufacturing production plants as well. Both these products are pillars of our future growth and winning these businesses will materially impact the future of NanoExplore and the graphene market as a whole. We have spent years of development with our Fortune 500 partners and are looking forward to expanding our partnership with them. For our graphene enhanced composite products, overall demand continues to be strong, but delays in new program launch, combined with the uncertainly created by potential tariffs, clouded the near-term outlook. These tariffs already have disruptive effects with volume reduction on programs, while OEMs get a handle on the potential impact of tariffs. Having said that, we continue to strive forward with investment in the new equipment and will continue to invest more as a part of our five-year strategy. 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 May-June timeframe and revenues to pick up by August-September. Finally, I would like to say that we are focusing on what to be controlled, which is operating improvement and making sure our balance sheet remains strong. I would like to thank the NanoExplore team for their dedication, focus and hard work in this challenging environment. With that, I will now turn the call over to Pedro who will provide details about our financial performance.

Thank you, Saurosh. Hello everyone. Good morning everyone. Today I will begin with a review of our Q3 results, followed by an update on progress of our five-year strategic plan, and conclude with some commentary on near-term capex spending and updated guidance for fiscal year 2025. Total revenues in Q3 were $30.4 million compared to $33.9 million last year. The reduction in revenue was mainly attributable to lower progress revenue recognition on new tooling being manufactured for three different customers as well as lower volumes from our two largest customers. While lower revenue recognition is purely attributable to timing, we believe the decrease in customer volumes reflects broader economic uncertainty affecting demand in the commercial vehicle market. Adjusted gross margins as a percentage of sales continued to increase year over year, reaching .4% during the quarter, an increase of 150 basis points. Despite lower sales during the quarter, the higher gross margins were in part driven by various manufacturing efficiency improvement initiatives, foreign exchange from a stronger US dollar, and higher sales of graphene powder. This year over year margin improvement has been a trend for the last 11 quarters and we are pleased to see this positive momentum continue. As a reminder to our shareholders and analysts, as the proportion of sales of graphene powder or graphene enhanced materials increases, gross margins as a percentage of sales will also increase. Adjusted EBITDA was $1.4 million versus $572,000 last year. Looking at our segments, adjusted EBITDA was $1.32 million in the advanced materials, plastics, and composite product segment compared to $1.26 million last year. And an adjusted EBITDA of $102,000 in battery cells and materials segment compared to a loss of $688,000 last year. The positive EBITDA in the battery cells and materials segment was a significant improvement versus last year mainly due to R&D grants related to work done by Bull to Explore on battery materials research, SR&ED tax credits, and lower spending. With regard to our balance sheet and cash flows, we ended the quarter with $20.7 million in cash and cash equivalent and $5.9 million in operating loans and long-term debt. Operating cash flows amounted to an inflow of $4.9 million in part due to operational performance and a reduction of non-cash working capital. Cash flows from financing activities were an outflow of $1.8 million, which consisted mainly of repayments of lease liabilities and long-term debt. Cash flows from investing activities were an outflow of $3.5 million, mainly related to capital expenditure payments related to the U.S. and Canadian plant expansions. Our cash, along with the unused space in our revolving credit lines, resulted in a total liquidity of $30.7 million at March 31st. Moving now to an update on the financial aspects of our five-year strategic plan. Regarding the expansion of graphene-enhanced SMC capacity, expansion of our Sanctity of the Bulls plant continues. During the quarter, the new press and peripheral equipment were received and installed, with final inspection and acceptance expected by the end of May. However, due to a reduced demand from our customer, the previously anticipated incremental production will be delayed and is now expected to begin no earlier than fiscal Q1 2026. Additional equipment related to the Graphene-Enhanced SMC initiative is expected in late summer, with production to begin in the second half of fiscal year 2026. Our U.S. expansion, which creates the additional capacity for the composites business, is also underway. During the quarter, we completed lease negotiations and signed a lease for our new plant in Statesville, North Carolina, about 30 minutes from our Newton, North Carolina plant. With most of the equipment arriving by the end of May, we expect production to start during the summer of 2025, adding incremental revenues from a newly awarded program that is expected to generate over $10 million annually. Turning now to our near-term CAPEX spending and fiscal year 2025 guidance. CAPEX spending in the quarter was in line with previous guidance, and we expect to spend $4 to $5 million in the next two quarters as the bulk of equipment is being received and installed. We expect to then reduce to $2 to $3 million or lower, with a goal of less than $1 million per quarter after that. We expect by the end of Q2 2026 to have completed the majority of the investments in our five-year strategic plan related to the Graphene-Enhanced SMC initiative. Finally, with regard to fiscal year 2025 guidance, as indicated during the last quarter's analyst call, the market for commercial vehicles was softening, and since then, we have not seen any improvements. Much of the anticipated growth for fiscal 2025 was expected to come from increased volumes on existing programs and the launch of two new customer programs. Unfortunately, the increase in volumes from existing programs has not taken place, and the launch of the two new programs has been delayed by the customers. Based on the customer's near-term forecasts, we now expect sales for the fiscal year 2025 to be at the same level as fiscal year 2024, or approximately $130 million. While this is disappointing development following a strong first half of the year, we remain optimistic about the outlook for the following fiscal year. The launch of the two new programs, as well as the launch of a newly awarded program for Statesville, and anticipated growth in growth Graphene powder sales are all expected to begin early in the new fiscal year, collectively contributing a minimum of $15 million in incremental revenue. This estimate is based on visibility we currently have with our customers, though it remains subject to change depending on macroeconomic conditions. With that, I will pass back to Piaf.

Thank you, Bill. Operator, we can now open the line for questions.

As a reminder, if you'd like to ask a question at this time, 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. Our first question comes from Amr Azat with Ventum Capital Markets.

Good morning. Thanks for taking my question. Good morning. Sarush, you mentioned potentially, and I might have misheard, potentially breaking up the expansion plans into phases. Should there be more delays? Just to clarify, since the CFPG and dry process Graphene initiatives are inherently interlinked, what does scaling back into phases mean? Does it just mean reduced scope for both? I.e. let's start with four tens instead of eight or something like that?

So we are anticipating to make a decision about this program by the next release, which are full fiscal release that comes sometime in September. That depends on the decision of the government related to the power requirement. We have received verbal approvals, but we haven't yet received official letter. So within the next little while, we will decide to either go with the project as it is. And if we cannot get the required power, we can look into moving the project to different jurisdictions. Clearly, we're talking about the United States or pretty much breaking the project to pieces. And when you talk about segmenting the project, it is a modular facility that can be chopped in half, but also can be broken to CFPG only or dry Graphene process only. When it comes to the feedstock, if the decision is the right process, we have to provide the feedstock needed for that process, which has been a difficult endeavor to find the right high purity byproduct for that. So again, it's a little premature to comment on that. We should get more clarity in the next few months.

Fantastic. And just to be very clear, your macro stance on how attractive the CFPG market is, and obviously the Graphene market is like, doesn't change. This is really a function of the delay in getting your incremental 2 megawatt power allocation.

There's no change in the market from the last quarter until now. Dry process Graphene fundamentals are still valid, and the CFPG market continues to be under supplied in North America. So it's more of a power requirement.

Understood. Then in the press release and in your prepared remarks, you gave detail on Graphene powder commercialization, I guess, like citing that it's very soon. Can you help us understand with more clarity the potential volume commitments that you would be getting either from drilling fluids or insulation foam? Are we talking about, you know, potentially one ton or are we talking about like four tons? Can you just give us an order of magnitude, I guess?

You mean 1,000 ton and 4,000 ton? I'm sorry, yes. What's the correct? 1,000 and 4,000. Yeah, there are definitely more than one and four tons. So on the drilling fluid, you know, both of these products, it depends also on the customer of our customer, right? So we can talk about the total addressable market in the drilling fluid lubricant. You know, an average well is going to be between two to four tons of Graphene to be used during the lubricant into the well. So, you know, if you're looking at tens of thousands of wells that is done worldwide, that can give you an estimate of total addressable market. Of course, we're not considering getting 100% of the market, but that should give you some estimate of how big that can get. In the insulation foam, that single customer can start with hundreds of tons and moving to 1,000 tons at maturity for that single customer. And of course, the total addressable market is much higher.

Then do you think you would be in a position to announce, you know, like the size of these POs or how should we think about the

cadence? We do our best to announce both customers, both their names and as well the volumes. But we have to get approval from the customer to do so.

Okay, great. Thank you. I'll pack the mic.

Our next question comes from Rupert Merrer with National Bank Financial.

Hi everyone, it's just Melissa being here for Rupert today. Just on your outlook, could you give us an idea of what you're seeing in your pipeline and what kind of conversations you're having with customers that led you to anticipate a soft Q4 and a stronger first half of 2026?

Well, the customers typically give us the visibility typically two, three months out, sometimes more, depending on the circumstances, and then they adjust it on a regular basis. So for Q4, just addressing your first question, Q4, we're halfway through. We already see that the Q4 is a bit on the soft side versus what we had earlier in the year, and that's why we have some confidence in what we believe is going to be the end-year results for the company. Now going into the future, we do see some growth that is going to come back, but that growth is on paper today and may be adjusted down the road. We do know that there are new programs coming online, so that is kind of like a new, a short thing. There are delays in programs that we are seeing that they are going to start very soon, so this is a good thing. And there are new programs that are going to be, or current programs that are active that we expect volumes to increase. What we're seeing is just the instability in the marketplace right now, probably since the beginning of the year, maybe even before the end of the calendar year 2024. We started seeing that the market conditions were a little bit unstable, and we can't say specifically that the Trump election is causing this, but there's definitely situations in the market that are causing our biggest customers to have flatter levels of production and even sometimes down production in their quarterly releases when they provide that visibility. So right now I think that we do have very good visibility into the next year. That's why Sush and I mentioned that we are very optimistic in our near term and even long term, of course, forecasts.

Perfect, understood. And just on your pipeline, are you having any additional conversations towards additional long term off take contracts with new customers, or what can you give us there?

Well, the long term customers really is more what Sush was saying with those two customers in drilling fluids and foams. Those two customers will be announcing with their permission at some future point when the relationship becomes commercial, which one is soon going to happen, and the other one is most likely going to happen before the end of the calendar year.

Okay, perfect. And last question for me. You've seen pretty strong cost control at both segments, but namely battery materials. Can you walk us through the main contributors to that and I guess what additional levers you have to pull there?

On the battery materials, the big swing in the quarter really was related to the support that they are providing, that the battery materials team is providing to the battery R&D. So if you may recall, we were granted a $3 million three year grant from the National Research Council last year, the IRAP program, and we leveraged the team in the Volta Explorer company to provide support on those initiatives, which led to some revenues there. We also had income investment tax credits that brought in revenues to offset some of the costs, and we also had a lot less spending. Last year at this time, we were still focused on the Gigafactory and still spending towards that goal. So this quarter, in comparison, we're no longer spending that much money on these initiatives as we have kind of paused this initiative. We still have the pilot facility, we still are developing R&D, and that's where those revenues have come from. So that's what contributed for Volta for the battery materials segment in the quarter.

Perfect, I'll leave it there. Thank you.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Pierre for closing remarks.

Okay, well, thank you, operator, and 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. You may now disconnect.