PyroGenesis Inc.

and thank you for standing by. Welcome to the Pyrogenics Canada third quarter 2022 business update 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 this session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, David Waldman. Please go ahead.

Good morning, and thank you for joining PyroGenesis' third quarter 2022 financial results and business update conference call. On the call with us today are Peter Pascali, Chief Executive Officer, and Andre Minella, Chief Financial Officer. The company issued a press release on Friday, November 11, 2022, containing a business update and financial results for the third quarter ended September 30, 2022, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Investor Relations. The company's management will now provide prepared remarks reviewing the financial and operational results for the third quarter ended September 30th, 2022. I'd like to remind everyone that this discussion will include forward-looking information that is based on certain assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. Forward-looking information provided on this call speaks only as 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 adjusted net loss and adjusted EBITDA, 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 non-IFRS financial measures, including a reconciliation of adjusted net loss and adjusted EBITDA net loss, please refer to the company's management discussion analysis, which along with the financial statements are available on the company's website at www.pyrogenesis.com and the company's corporate filings on CDAR at www.cdar.com. With that, I'll now turn the call over to Peter Pasquale, President and Chief Executive Officer. Please go ahead, Peter.

Thank you, David, for that introduction. And thanks to everyone for joining us today on our call. Our Genesis delivered another quarter with strong margins against a difficult logistical and inflationary environment for heavy industry manufacturers and their customers. This demonstrates our careful yet committed approach to diversification that provides various guards against rising inputs, both direct and macro, such as labor, currency and supply chain disruption related costs. With our strong production margins firmly established and our operational and sourcing approaches proven again as not just viable but sustainable and secure, we can remain squarely focused on maturing the commercialization plan enacted over the past two years. That implies turning a very large pipeline into sign new business, finalizing various ventures that have been in long-term testing, planning, or negotiation, and moving certain of our R&D initiatives into more fully realized customer-ready solutions. Some of our customers experienced implementation or order delays due to the continued infrastructure, personnel, and parts availability challenges affecting industries across the spectrum. However, we remain confident in our positioning and long-term plans given our continuing introduction of niche plasma torch solutions, a focus on large companies seeking technology solutions for greenhouse gas reduction and production output optimization and our above industry average margins. Margins that continue to outpace both the sector we are in and even the industries we serve. Those include the industrial machinery sector at 27.6% gross margin, the aluminum industry at 20.6%, iron and steel at 25.3%, metal mining at 24% and aerospace and defense at 8.56%. Combined with the upcoming commencement of major trials of our key plasma products and the near completion of various testing and certification process by other clients, we continue to see a positive future with continued strong margins. Importantly, as the global economy continues its transition out of the disruption it has faced over the past several quarters, a return to logistical and resourcing stability for heavy industry and government customers throughout the rest of 2022 and 2023 is anticipated, but with possibly a renewed sense of urgency. The company's backlog of signed contracts is approximately $26 million, while the potential contract pipeline has expanded significantly. We continue to execute on our business growth strategy by offering technology solutions that provide benefits from greenhouse gas emissions reduction, clean electric fuel sources, safe waste destruction, and improved production output and quality that take advantage of the company's expertise in patented ultra-high temperature processes for heavy industry. We also continue to build upon established customer relationships, introducing new solutions and entering new markets, setting an ongoing success for years to come. Despite the worldwide macroeconomic headwinds, which have been exasperated by international supply chain volatility, both of which have affected our clients' planning, logistics, and spending, Pyrogenesis continues to demonstrate its ability to execute productively in Q3 2022. While existing and prospective customers saw delays as they continued to manage their own backlog of projects through their resource personal infrastructure availability, and the stage setting of the first half of the year continued into Q3, we maintained our focus on production efficiency, steady progression towards full commercialization for our emerging business lines, the pursuit of innovation, and expanding the relationships with existing and potential clients. In the face of continued macro uncertainties, we remain firm in the belief that pyrogenesis is well positioned and remain confident in the potential sales increases cited in the previous Q2 outlook through 2023 and beyond. The reasons for this are simply fourfold. First, we believe that the heavy industry commitments to fossil fuel related carbon reduction measures made years ago are quite frankly here to stay. This commitment has only intensified in the face of increased pressure from rising carbon pollution penalties combined with the significant volatility seen in fossil fuel availability over the past three years. Second, concerns focusing on commodity security are driving optimization efforts across the metal sector with aluminum producers, steel makers, and other metal producers seeking in-line technology solutions to improve output percentages of primary, secondary, tertiary, and even unprocessed waste from other mineral production sources previously considered as exhaustive. Third, the trending global shift back to increased electricity-based power will result in more major infrastructure creation across renewables, hydroelectric, and even nuclear installations, benefiting industries and technologies such as pyrogenesis, with electricity-ready solutions. Last but not least, Pyrogenesis' clean, electricity-based technology has proven effective, efficient, and to such a degree that even in the absence of the above, its benefits cannot be ignored. Pyrogenesis' R&T team has been dedicated over the past three decades to plasma-based environmental solutions. These solutions are already impacting heavy industry as they prioritize the many issues facing them today. Greenhouse gas emissions reduction, fuel switching to combustion-free electric sources, improved value recovery of metal waste streams, enhanced metal production output from the same input, safe destruction of hazardous waste, and more rapid and higher quality metal powder production for component weight reduction are just to name a few. This underscores our belief that we are well positioned with respect to both our recent critical milestones and our long-term positioning. We look forward to additional milestones that have been in the works for several quarters, including the first ever in-factory trials of plasma burners within an iron ore pelletization furnace. a major upstream step in the steelmaking process, with two separate global iron ore producers. The conclusion of the certification process for the company's titanium metal predators from a major global aerospace firm, and the potential sale of various aluminum industry solutions related to metal dross processing and fuel switching. Over the past several years, Pyrogenesis has successfully positioned each of its business lines for growth by strategically partnering with multi-billion dollar entities. These entities have identified Pyrogenesis offerings to be unique, in demand, of such a commercial nature as to warrant a long-term supportive relationship that the company has experienced while it ramps up various technologies to commercialization. The intense pressure on heavy industry to reduce their fossil fuel and greenhouse gas impact while improving their output allows pyrogenics to expect interest from many industries, but especially aluminum, iron ore, and steelmaking to increase as the trend to fuel switching from fossil fuel burning gases to clean electric sources such as plasma torches grows. I'll be back with some final thoughts at the end, but at this point, I'd like to turn the call over to our Chief Financial Officer, Andre Manella, to go over the financials in detail. Andre? Thank you, Peter, and good morning, everyone. I'll begin with the income statement, where total revenue for the three-month end of September 30, 2022 was $5.7 million compared to $9.3 million for the same period last year. Total revenue for the first nine months of 2022 was $15.7 million compared to $23.9 million for the same period of the comparable year. The revenue variation was mainly due to a decrease in sales related to Drossrite, as well as a decrease in support related to the U.S. Navy and biogas upgrading and pollution control, but offset by an increase in pure VAP and torch sales. As of November 10, 2022, The company had a backlog of signed or awarded contracts of approximately $26 million. Gross profit for the three months ended September 30th, 2022 was 4.1 million or 73% of revenue compared to a similar profit of 4.1 million with 43% of revenue for the three months ended September 30th, 2021. As for the nine months ended September 30th of 2022, gross profit was 7.7 million compared to 11.1 million for the same period last year. The increased quarterly gross profit was caused mainly by a decrease in direct materials, manufacturing, and overhead costs, offset by a variation in employee compensation, subcontracting, and foreign exchange. Selling, general, and administrative expenses were $5.9 million and $18.6 million for the three- and nine-month period ended September 30, 2022, respectively. That compares to $4.9 million and $15.3 million for the three and nine month periods of last year respectively. The increase in SG&A expenses was primarily due to the effects of the pyro green gas acquisition that was completed in August of 2021, an increase in employee compensation, professional fees, office in general, travel, depreciation of property and equipment, and of the ROU assets and government grants. Additionally, the share-based expense increased to $932,000 for the recent quarter in comparison to just under $700,000 for the same period of 2021. Research and development expenses for the three-month end of September 30, 2022 was $290,000 compared to $394,000 for the same period of last year. The decrease in R&D expenses is primarily related to the decrease in employee compensation and subcontracting materials and equipment costs, but offset by the variation of IPC. During the first nine months of fiscal 2022, net spending on internal R&D was just under 1.6 million. And that's comparable to a little over 1.5 million of 2021, but primarily due to a slight increase in R&D activities that were performed. Comprehensive loss for the three months ended September 30, 2022 was 4.1 million compared to an income of 0.6 million for the same period as last year. The modified EBITDA, which we used to measure ongoing operations, was a loss of $0.6 million for the current quarter compared to a loss of $0.2 million for the same quarter of 2021. The modified EBITDA excludes $0.9 million of non-cash share-based expense and a $1.8 million adjustment to the fair market value of strategic investment due to the decreased market value of common shares and warrants of HPQ Silicon resources owned by the company. The modified EBITDA also adjusts for the following items, which increase in the quarter. $61,000 for depreciation of property and equipment, $127,000 for amortization of intangible assets, and $177,000 of financial expenses. As of September 30th, 2022, the company had a $2.4 million of cash and cash equivalent balance on its balance sheet. As mentioned, our growth profit this quarter remains high. And even without the one-time IEP revenue, raising the growth margin substantially to 73%, the growth margin would still approach 30% for the quarter. A number that surpasses many of our competitors and the averages for companies and industries we primarily serve, which include Illumina, iron and steel, aerospace, and defense, and industrial machinery. Also to note for the IT sale, we wanted to mention that we have not press released the details of the IT sale, as we are still waiting for our customers to also do their press release. And a final note, it's also beneficial to mention that the company has projects at various phases of completion, and those closer to the final delivery stage incur costs and thus corresponding revenue at a slower pace or at different various phases. At this point, I'll turn the call back to you, Peter. Thank you very much, Andre. As you can see, Pyrogenesis considers 2022 to be a strong platform for which future growth will step. In the face of global headwinds and uncertainty, we are committed to focusing on the production efficiency, steady progression towards full commercialization for emerging business lines, the pursuit of innovation, and deepening the relationships with existing and potential clients that have served us successfully to this point. Providing heavy industry with technology solutions to pressing environmental, engineering, and energy challenges while meeting their carbon reduction goals remains Pyrogenesis' primary goal and focus. In conclusion, we're very pleased with the progress we have made during the quarter and believe we have set the stage for continued success. We remain committed to driving shareholder value and look forward to providing further updates as developments unfold. I'd like to thank you for joining the call today. At this point, we'd like to open the call up to questions. Operator?