PyroGenesis Inc.

Good morning everyone and thank you for joining ParaGenesis 2023 Second Quarter Financial Results and Business Update Conference Call. On the call with us today are Steve McCormick, Vice President of Corporate Affairs, Andre Manala, Chief Financial Officer. Peter Pascali, Chief Executive Officer, will not be joining us today as he is currently on a business trip. The company issued a press release on Thursday, August 10, 2023, containing a business update and financial results for the second quarter which ended June 30, 2023 and which can be viewed on the company's website. If you have any questions after the call or would like any additional information about the company, please contact the IR department. The company's management will now provide prepared remarks reviewing the operational and financial results for the second quarter ended June 30, 2023. I would 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 in this call speaks only as of 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 each of adjusted net loss and adjusted EBITDA to net loss, please refer to the company's management discussion and 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 CEDAR at www.cedar.com. With that, I will now turn the call over to Steve McCormick, Vice President of Corporate Affairs. Please go ahead, Steve.

Thanks, Rodania, and thanks to everyone for joining us today on our call. I'm going to start off with a quick review of some of the company's top-line financials, followed by a summary of key business activities that occurred during the quarter. I'll then turn the call over to the company's chief financial officer, Andre Vanilla. So we exited the quarter with revenues of just over $3 million, which was lower than desired, especially after the expectations set by the company's highest ever second quarter results from 2021 and 2022. While lower, this quarter's results are not out of range when compared to the rest of the company's second quarter financial history, but certainly leaves room for improvement as the company works to regain the momentum of the last two years. Gross margin was up considerably to 37%, rising back to a level more consistent with the company's past second quarter results. Given that several of the company's technology solutions are either only recently commercialized or can have long time spans between orders of a similar system type, we regard any high or even medium-sized margins at such an early stage as very positive and a strong sign for the future. As the company continues to focus on improving efficiency for its technologies while growing its customer base, future sales should improve margin even further. The 37% gross margin is also notable when compared to the industries the company primarily serves, who continue to have difficulty maintaining 2022 level margins due to persistent logistical difficulties and an inflationary environment for heavy industry and their customers. For example, overall aluminum industry margins continued to fall to 6.3% in the second quarter, down from approximately 19.8% in 2022. Iron and steel industry margins are down to 26.9% from 30.7. Metal and mining fell to 28% from 31.5. And aerospace and defense is at 20.7, down from 25.6, all Q2 versus previous year's Q2. And when compared to other industrial machine and component manufacturers, pyrogenesis 37% is slightly ahead of the sector, with the broader industry registering 36.3 second quarter margin. And finally, backlog, which for the quarter was a bright spot, growing to 33.9 million. This represents the 12th quarter out of the last 15 above 30 million in backlog since the company first reached that mark in 2019. In general, and as stated in previous reports, the company's revenues are likely to be irregular and unpredictable quarter to quarter as contract-related revenue fluctuates for a variety of reasons. Revenue is accrued on a percentage of work completed model that varies based on both the nature of the project and the client's own scheduling and logistical decisions, both of which can impact the company's production milestones and resulting ability to book revenue. During this period of continued supply chain, logistical, and inflationary challenges, those issues have been more frequent and exacerbating. As noted in the 2022 year-end report, some client projects were indeed experiencing longer-than-expected client logistical or project management delays, impacting the company's ability to conclude key aspects of projects, such as commissioning, that would advance revenue progression. And this continued into 2023, contributing to the lower quarterly revenue for the first half of the year. Also noted in the 2022 full-year report was the additional caution and highly methodical approaches occurring within industries undergoing decarbonization efforts, especially in regards to fuel switching to electricity. These changes are often preceded by first-time and lengthy pilot and testing phases, where unanticipated issues can often lead to delay. An example of this, of just such an occurrence, was reported by the company in this quarter's outlook, whereby the company's iron ore pelletization torch client suffered damages after torrential rainstorms that affected the Montreal area. The furnace containing the company's torches was impacted, causing several weeks' delay to the current site acceptance testing leading up to the trials. Overall, while the financials for the second quarter were an improvement on Q1 by 17%, we still have work to do as existing customers continue to press forward on slower moving projects while resolving their own logistical issues our aim is to add more concurrent overlapping and higher profit projects to help offset slowdowns that may occur in other areas we continue to increase sales and marketing efforts to this end the significant improvement in margins the ongoing focus on efficiency And the recent signing of contracts in new markets bodes well for this objective. And now on to company business. First, a reminder of the company's business strategy that the company outlined starting in the 2022 year end results. The company is a provider of a growing technology ecosystem for heavy industry with a number of solutions in different stages from early pilot to full commercialization. That ecosystem is a concentration of offerings under three verticals that align with the economic drivers key to heavy industry. These three verticals are energy transition and emission reduction, which focuses on fuel switching, helping heavy industry reduce their fossil fuel use and lower their greenhouse gas emissions by utilizing the company's electric-powered plasma torches and its biogas upgrading technology across various process steps. Second, waste remediation, the safe destruction of hazardous materials and the recovery and valorization of underlying substances such as chemicals and minerals that can be reused or resold. And third, commodity security and optimization, which is using the company's technology to aid in the recovery of viable and in the optimization of production output. Both actions meant to improve the availability of critical minerals such as titanium, aluminum, magnesium, and others that are essential for modern manufacturing. But first, there was a key development that occurred post-Quarter M that the company believes will have impact for the years ahead. On August 1st, the company was awarded a $4.1 million contract to produce a 4.5 megawatt plasma torch system for a U.S.-based aeronautics and defense contractor. Both the client and the technology contracted for are positive developments for the company's future. The nature of the client, a highly regarded but confidential contractor for the U.S. government, as well as for public and private corporations, helps to reaffirm Pyrogenesis' long-term opportunity within both military and aeronautics. The technology, a 4.5-megawatt plasma torch system, reveals a necessity for appreciably higher power levels solutions made without fossil fuels, the demand for which the company sees accelerating as a result of advancing global energy transition measures. Higher powered systems such as the 4.5 megawatt and beyond will help the company expand into other heavy industries such as glass, cement, and petrochemical that are also facing tightening greenhouse gas emission regulations while considering moves toward electricity. Moving now to actual in-quarter Q2 production highlights. In the energy transition and emission reduction vertical, in May, the company announced that its subsidiary, Pyra Green Gas, had successfully completed the integrated coal test step, or ICT, under a previously announced $9.3 million project with a key client who is one of the world's top diversified steel producers. The test completion marked a significant milestone towards the completion of the overall project, where Pyro Green Gas has been mandated to supply first, coke oven gas purification solutions, and second, hydrogen production processes that combined have the potential to allow for the extracting of hydrogen with a 99.999% purity level, while improving the client's environmental outcome. With the implementation of Pyro Green Gas's hydrogen extraction technology, the client would benefit from a cleaner energy source for its annealing, galvanizing, and acid recovery processes, helping to reduce its carbon footprint. The ICT step confirms that all systems, equipment, and their components meet and exceed the required operation and safety standards. Within commodity security and optimization, this quarter, saw a major corporate breakthrough, as in May, the company announced the signing of its first commercial by-the-ton order for titanium metal powder, a key material used in additive manufacturing, the ink, so to speak, that is used by 3D printers to make metal parts and components. The contract was for five metric tons, or 5,000 kilograms, with a provisional order for an additional six tons. These titanium metal powders are being produced using the company's next-gen plasma atomization system, which the company has spent several years designing, developing, and testing to produce what is planned to be among the highest quality titanium metal powders available. The next-gen system has evolved from producing initial test batches measured in grams to sample batches measured in kilograms and then hundreds of kilograms. The company's stated goal had been to gain orders by the ton, and with this order from an advanced materials company in the U.S. who has requested anonymity, that goal has been achieved, signaling full entrance into the titanium metal powders marketplace. In June, the company announced an achievement regarding its Gen 3 PureVap Quartz Reduction Reactor Pilot Plant, or QRR, which received successful laboratory validation that high purity silicon rated 3N plus was produced in one step from quartz. During test number five of a multi-test phase, the pilot plant achieved an average silicon purity percentage of 99.92% across two separate tests, This outcome validates the capability of the QRR process to surpass the minimum purity requirement of 3N or 99.9% that is needed for battery-grade silicon, especially silicon used in electric vehicle batteries. As noted at the time in the client's news release, silicon, also known as silicon metal, is a key strategic material needed for the decarbonization of the economy and the renewable energy revolution. However, silicon does not exist in its pure state and must be extracted from quartz in what has historically been a capital and energy intensive process. As invented by pyrogenesis, the PureVap is an innovative, patented process that will enable the one-step conversion of quartz into high-purity silicon at reduced cost, reduced energy input, and carbon footprint. The client, HPQ Silicon Inc., is an advanced materials company that offers a unique portfolio of sustainable silica and silicon solutions sought after by electric vehicle and battery manufacturers, among others. Pyrogenesis is the engineering and development producer, but also as part of the terms of the contract with HPQ, Pyrogenesis benefits from a royalty payment representing 10% of the client's sales with set minimums. And lastly, for the company's waste remediation vertical, In June, the company signed two contracts with Illuminary Alouette for projects to valorize residue waste streams from primary aluminum smelters. Alouette, located in Quebec, is home to the largest aluminum smelter in the Americas. The first contract is to further advance the technology to treat spent pot lining, or SPL, that the company originally announced in March of 2021 upon receipt of a research grant to study the concept. pot linings are the insulating carbon material that helps enable electric electrical conductivity inside an aluminum smelter cell called a pot as part of the process of turning aluminum oxide into aluminum this lining typically has an average lifespan of about five years after which it eventually fails from continuous use causing the pot to be considered spent and put out of service and the highly contaminated linings to be removed and replaced An estimated 1.5 million tons of spent pot linings are produced annually worldwide. Pyrogenesis SPL remediation technology has now advanced to the point where full participation of Alouette in partnership with Pyrogenesis has commenced. If Pyrogenesis' proposed process proves successful, it could address a major issue concerning the aluminum industry. The second contract is geared to develop a new valorization solution for material known as excess electrolytic bath. In both instances, the dangerous materials, if processed correctly, can be recovered and reused by the primary aluminum producer. Both projects have a commercial end goal to market the solutions industry-wide in conjunction with the luminary alouette. to read about additional events and updates to ongoing projects not discussed on this call please refer to the corresponding section of the news release or the management discussion and analysis in particular the outlook sections of those documents i'll be back at the end for some final thoughts but at this point i'd like to turn the call over to the company's chief financial officer andre manella to discuss the financials in more detail andre thank you steve and good morning everyone

Let me begin with a review of our financial results. Total revenue for Q2 2023 was $3 million compared to $5.8 million for the same period last year. Revenue for the first six months of 2023 was $5.6 million compared to $10.1 million for the same period of 2022. Although second quarter revenue for 2023 was modest by recent company standards, in previous years, only 2021 and 2022 showed second quarter revenue larger than this year's Q2 results. The revenue variation was seen as a general decrease in individual product lines, except for increased sales related to development and support related to the U.S. Navy and increased sales related to spark refrigerant destruction, which both increased by 0.2 million each. As of August 10, 2023, the company had a backlog of signed and or awarded contracts of $33.9 million. The company's backlog grew again, remaining very comfortably above both the $10 million backlog level that was reached for the first time in Q2 of 2019, and the $25 million backlog threshold first established in Q3 of 2019. This quarter's 33.9 million backlog also represents a rise from Q1 2023 and Q4 2022, which were both at 30.6 million and 32.4 million respectively, and is in fact the fifth largest quarterly backlog in the company's history. Growth profit for Q2 23 was $1.1 million or 37% of revenues and compares to 2.5 million or 43% for Q2 of 2022. That six-month period ended June 2023, the growth profit was 1.6 million or 29% compared to a growth profit of 3.5 million or 35% for the six months ended June 2022. The company's healthy growth margin achieved in the current quarter represents a large rebound of more than 1600 basis points from q1 which was 20.3 percent and a 22 basis points over q4 2022 which was 14.5 margin this quarter comprised no special or one-time measures contributing to this 37 margin and is based exclusively on production The decrease in the gross profit margin was mainly attributable to the impact of employee compensation, foreign exchange, and finally, to the amortization of intangible assets, which does not vary based on revenue. Selling, general, and administrative expenses were $6.4 million and $14 million for the three- and six-month period ended June 30, 2023, respectively, and compares to $7.1 million for Q2 of 22 and $12.7 million for the same 2022 six-month period. The decrease in Q2 2023 is mainly a result of the share-based compensation expense, which is a non-cash item and relates mainly to prior year's grants not repeated in 2023. The share-based compensation expense for the three-month period ended June 2023 decreased to $0.7 million, down from $1.7 million in Q2 of 2022. Also as part of the SG&A reduction, professional fees for Q2 2023 were $1 million, which decreased by $0.8 million compared to the Q2 2022 period due to a reduction in tightening in accounting fees, legal, and investor-relation expenses. The offsetting increase to our SG&A expenses included employee compensation and to the expected credit loss, which increased to $0.7 million in Q2 2023, and is due to the additional quarterly allowance, whereby no such expense was reported in the comparable period. Research and development expense for Q2 of 2023 was $0.7 million compared to $0.8 million for Q2 of 2022. This slight decrease in R&D expense for Q2 of 2023 is related to less material than equipment expense offset by an increase in employee compensation for a net variation of $60,000. Net finance costs amounted to a $0.9 million income in the current quarter versus an expense of $0.2 million in Q2 of 2022. The favorable variation of $1.1 million is due to the reversal of a liability connected to the balance due on business combination. This milestone payment will not be required and therefore the reversal of the liability favorably impact the income statement. The change in fair value of strategic investment for the current quarter was a loss of $1.2 million versus $7.5 million for the comparable quarter. This was caused by both the disposition and to the fair value of the common shares and warrants of HPQ recognized in the period. Comprehensive loss for Q2 2023 was 6.3 million, reflecting a decrease of 6.7 million compared to Q2 of 2022. This decrease is summarized as a decrease in SG&A, explained earlier, a decrease in cost of sales and services while achieving a 37% gross margin, a decrease in financial expense, and most significant, the changes in the strategic investment. Lastly, the modified EBITDA, a useful metric in assessing the company's operations, as it excludes non-cash and or discretionary items, with a loss of $4.7 million in Q2 2023, compared to a loss of $3.2 million in the same period last year. This is an increase of $1.5 million and is explained by the comprehensive loss detailed earlier and adjusting mainly for depreciation and amortization, net finance costs, share-based expense, and fair value adjustment. At this point, I'll turn the call back over to Steve.