PyroGenesis Canada Inc. (NASDAQ:PYR) Q4 2022 Earnings Call Transcript

PyroGenesis Canada Inc. (NASDAQ:PYR) Q4 2022 Earnings Call Transcript March 31, 2023

Operator: Good day, and thank you for standing by, Welcome to PyroGenesis Canada, Inc. 2022 Fiscal Year Financial Results and Business Update Conference call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Rodayna Kafal, Vice President, Investor Relations. Please go ahead.

Rodayna Kafal: Good morning, everyone, and thank you for joining PyroGenesis 2022 fiscal year financial result and business update conference call. On the call with us today are Steve McCormick, Vice President of Corporate Affairs; Andre Mainella, Chief Financial Officer; Peter Pascali, Chief Executive Officer, who recently underwent knee surgery and is currently recovering. He will not be presenting, but he will be able to join us on the call. The Company issued a press release today, March 31, 2023, containing a business update and financial results for the year ended December 31, 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 the IR department.

The Company’s management will now provide prepared remarks reviewing the financial and operational results for the year ended December 31, 2020. 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 obligations 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 be also references to certain non-IFRS financial measures, including a reference to modified 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 modified 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 SEDAR at www.sedar.com.

With that, I will now turn the call over to Steve McCormick, Vice President of Corporate Affairs. Please go ahead, Steve.

Steve McCormick: Thanks, Rodayna, and thanks, everyone for joining us on our call today. I’m going to start off with a quick review of business highlights. I’ll follow that with some very top-line numbers and then add a little general perspective before turning it over to our company CFO, Andre Mainella. So, 2022 saw a continued advancement by the Company beyond its earlier roots as a specialty engineering firm till today, where the Company is a provider of a growing technology ecosystem for heavy industry with a variety of solutions that can work together to help address key strategic goals, particularly around industrial decarbonization, but also in new areas that I will outline shortly. Major deliverables and business milestones for 2022 included the following: for the companies developing metal powders for additive manufacturing or 3D printing division, in May, it was announced that the first two commercial size orders for titanium metal powders produced using the NextGen plasma atomization process were received and delivered.

Both orders were for 100 kilograms, one of which was to the Company’s strategic partner, Aubert & Duval, a major European supplier of metal powders. The second order was to a confidential customer. While these orders were relatively modest, they represented a very important jump in scale from previous sample batch sizes measured in grams to batches in the hundreds of kilograms. This was both a technological milestone and a commercial one offering a measure of validation for the NextGen system that the Company has been developing and perfecting for the past several years. Additionally, for metal powders in September, the Company announced that the large global aerospace OEM the Company has been working with for the past few years had conducted an in-house quality audit of PyroGenesis’ metal powder production facility and process.

Subsequent to year end, it was announced that the Company had completed the required steps incurred as a result of the client’s on-site visit and had passed the audit. As a reminder, this was all part of a more than two year process of qualification towards an end goal of becoming a certified supplier of metal powders to this firm to its manufacturing suppliers and to its service centers. The Company was then progressed to the next step where its metal powders will be chemically tested per client defined process and scheduling the timing of which PyroGenesis has no input into. If testing and successful PyroGenesis’ titanium metal powders will be recognized as a certified material by the global aerospace OEM. The Company would be added to the aerospace firm’s extensive process, catalog, and procurement system.

And the Company would be on the roster for potential future material bids or orders by the various manufacturers and service groups that serve the client. Also, as a reminder, the Company specifically chose this lengthy path, subjecting its powders and process to a very high level of scrutiny with one of the world’s most recognized firms as a way of re-entering the market at one of the highest possible levels. The Company believes the added scrutiny has helped to make PyroGenesis metal powders division even better than planned, and that a successful outcome with this firm may result in a trickle-down effect to other companies through the added recognition and awareness of the quality standards undertaken. Also, the Company continued to evolve its metal powder strategy for European market expansion with the goal to eventually build and operate a metal powder production facility in Europe.

Subsequent to year end, the Company announced the hiring of Mr. Olivier Dubois as the Company’s principal advisor for European operations and sales. An executive with vast experience, including his familiarity of PyroGenesis’ metal powders, capabilities, while as an executive at Aubert & Duval, Mr. Dubois will offer key strategic and operational know-how as we move to execute on European and global plans. Turning to plasma torch for iron ore pelletization, the Company continued to progress its major initiative to supply clean electric plasma systems to large iron ore companies for first ever trials in this upstream step for the steelmaking process. In July of 2022, a system was completed and delivered to the first client. And subsequent to year end, four systems were delivered to a second client.

Those two companies are arguably the two largest and most prominent iron ore firms globally and each has made a significant commitment of time, finances, and logistics while working with PyroGenesis over the past few years to get to this point with the testing of plasma to replace fossil fuel-based burners in furnaces will undergo live on-site trials. With the completion of these deliveries, both clients now have all the necessary components on-site at major iron ore mining and processing locations and the installation trials and site acceptance testing will proceed at the client’s discretion. The Company announced a series of new innovations in 2022, including in May announcing a joint evaluation with a major manufacturer to test the plasma torches in aluminum scrap remelting and holding furnaces.

In June, a joint initiative with an applied engineering firm to examine the use of plasma and carbon anode baking ovens, a vital component needed for the aluminum production process, the traditional use of natural gas to help form the carbon anode. In September, the Company’s selection by a producer to develop and test two processes produced during magnesium production, including cleaning and decontaminating of certain particulate matter and recovery of magnesium from waste stream dross. In November, the Company’s successful production of hydrogen from methane occurred using clean plasma energy that results in hydrogen categorized as Turquoise. On the hydrogen color spectrum, Turquoise being one of the lowest emission categories, as well, the Company continues to progress its development of an innovative solution to safely recover valuable metals and residues from the heavily contaminated carbon-lined cells or pots that form the inside of an aluminum smelter in conjunction with project partner, Aluminerie Alouette, the largest primary aluminum smelter in the Americas.

Additional technology benchmarks were met during 2022, and the companies have recently made a further longer commitment details of which may be discussed at a later date. Now turning to some key top-line financials. The Company delivered another year of strong margins against what remains a very difficult logistical and inflationary environment for heavy industry manufacturers and our customers. Gross profit margins for 2022 increased to 43% compared to 40% in 2021. This outcome demonstrates that the careful yet committed approach to diversification it allows for various guards against rising inputs such as labor, currency, and supply chain disruption related costs as well as the continued focus that the Company has undertaken on production refinement.

It should be noted that this year the 43% margin was achieved despite the fourth quarter margin being at a relatively low 14%, the details of which are related to a one-time production expansion in the absence of an impending updated budget for the US Navy that was in process prior to quarter’s end. As for overall revenue, the Company was disappointed in the year-over-year decline and that a slower pace of technology adoption occurred in 2022 than was anticipated, particularly with our aluminum sector prospects. We faced a variety of changing dynamics throughout the year, including energy price spikes, trade volatility, and raw material shortages that caused them to adjust priorities and financial commitments on the throughout the year. Additionally, as stated in the MD&A, some projects experienced 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 further impacting expected revenue.

The Company has noticed a trend in this regard with additional client caution occurring through our project phases across the industry. And as mentioned in the news release, the Company acknowledges that because it is selling into industries contemplating significant technological change, especially in regards to fuel switching to electricity that may bring various ramifications, including the possibility for time lags as customers conduct lengthy due diligence to counter the types of concerns likely seen only during major paradigm shifts such as these. As such revenues are likely to be regular and unpredictable quarter to quarter and along with the Company being at the early stage of wider market adoptions for some of its core lines of business is a key reason why the Company does not currently provide forward-looking guidance.

That said, the degree of uncertainty around industrial decarbonization was further reduced during 2022 as governments, especially in North America with the US Inflation Reduction Act or IRA and the major increases to Canadian green energy investment tax credits, implemented billion-dollar incentive programs toward a low-carbon economy. PyroGenesis was engaged in several additional industry requested technology research initiatives. While signed order intake slowed in 2022, customer-partnered studies and research increased substantially. These R&D-related partnerships have for many years been at the core of the Company. And while there is no guarantee, we feel that this level of client interaction at the business development level serves to deepen industry relationships and bodes well for future revenue opportunities.

As mentioned in my opening statement, the Company has been thinking beyond decarbonization. As interest from heavy industry in the Company’s products continues to increase and the variety of uses for its core technologies has expanded, PyroGenesis has recently refined its business strategy. While still leveraging off the Company’s expertise in ultra high-temperature processes, the Company is now adjusting its business approach into three major verticals or categories that directly match some of the economic drivers that are key to global heavy industry. The first is energy transition and emission reduction, which focuses on fuel switching helping heavy industry, reduce fossil fuel use and greenhouse gas emissions by utilizing the Company’s electric-powered plasma torches and biogas upgrading technology in various processing roles.

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Second is commodity security and optimization. The recovery of viable metals and the optimization of production to increase output to maximize raw materials and improve availability of critical minerals. And third is waste remediation. The safe destruction of hazardous materials and the recovery and valorization of underlying substances such as chemicals and minerals that are contained within the waste. Within each vertical, the Company has several solutions already and is working on several more, all at different stages leading up to commercialization, and some, of course, already commercialized. A visual graphic showing a partial breakdown of these verticals and the Company’s underlying solutions was included in today’s news release. The Company’s intention is to roll out more solutions to meet these key economic drivers for heavy industry over future quarters and years.

In summary, PyroGenesis believes its market opportunity remains large as major industries such as aluminum, steelmaking, manufacturing, and government require factory-ready, technology-based solutions to help steer them through the paradoxical landscape of increasing demand and tightening regulations and material availability. 2020 was a disappointing year for general revenue, but we believe it remains a foundational year for the Company’s future. With a deeper understanding of the landscape in the key economic drivers for heavy industry, with ever deepening relationships partly as a result of an influx of client-driven and industry partners studies and joint initiatives with a horizon of key milestones in metal powders and plasma torches still to come and with the revised business strategy, the Company’s ambitions remain robust.

I’ll be back at the end with a few more comments. But at this point, I’d like to turn the call over to the Company’s Chief Financial Officer, Andre Mainella, to go over the financials in more detail. Andre?

Andre Mainella: Thank you, Steve, and good morning, everyone. I’d like to use the time to cover the quarterly and annual performance of the Company. Total revenue for Q4 2022 was at $3.3 million compared to $7.2 million for the same period last year. For the entire fiscal year 2022, revenue was $19 million compared to $31.1 million for the same period last year. The revenue decrease was primarily caused by a decrease in sales related to DROSRITE related sales as well as a decrease in support related to the US Navy, and biogas upgrading, but offset by an increase in torch sales. We do believe this decline in sales is temporary in nature and common in the fourth quarter, but also driven by timing and market factors outside our control.

This is best illustrated by the growth in our active sales pipeline. As of March 31, 2023, the Company had a backlog of signed and/or awarded contracts of $32 million. Gross profit for Q4 2022 was $0.5 million or 15% of the revenue approximately compared to a gross profit of $1.3 million or 18% of revenue for Q4 of 2021. Annually, the gross profit for fiscal 2022 was $8.1 million or 43% of revenues compared to $12.4 million or 40% for fiscal ’21. The improvement in gross profit margin for fiscal ’22 was primarily related to a decrease in direct material costs, offset by an increase in employee compensation, subcontract costs, manufacturing costs, and foreign exchange. Selling, general and administrative expenses for the current quarter Q4 2022 were $10.4 million, representing a decrease of 13% compared to $11.9 million for Q4 of 2021.

The decrease is mainly a result of less employee compensation, a decrease in share-based compensation expense of $3.6 million, and a decrease in other expenses, which in Q4 of ’21 comprised of insurance, taxes, interest, and bank charges. Professional fees for Q4 ’22 were greater due to an increase in legal fees, accounting costs, investor relation fees, and patent expenses. And more important, in Q4 2020, a credit loss of $4.5 million was recorded as a noncash provision on accounts receivable and costs and profits and excess of billings. SG&A expenses for fiscal ’22 were $29 million compared to $27.2 million for fiscal ’21. The increase in SG&A expenses were attributable partly to the Pyro Green-Gas activity, which is included for 12 months in 2022 with only five months of 2021 and also mainly due to an increase in employee compensation, professional fees, office and general expenses, travel, depreciation of property and equipment, depreciation of ROU assets, government grants, and other expenses.

Additionally, the share-based expenses decreased to $1.3 million in Q4 2022 compared to $4.9 million in the same period of 2021. And in fiscal ’22, share-based expense decreased to $5.5 million compared to $9.8 million for the same period of 2021. This was directly impacted by the stock option grants in Q4 of 2021 and their specific vesting structure, such options vest between 10% and up to 100% on the grant date, and thus requiring an immediate recognition of that cost. Research and development expenses for Q4 ’22 were $741,000 compared to $1.1 million for Q4 of 2021, and on an annual basis for 2022 were $2.3 million compared to $2.5 million in the prior year. Any decrease in R&D expense is primarily related to a decrease in R&D activities, the type of contract being executed, the nature of the project activity, and the decrease in government grants.

As a result of the details explained, comprehensive loss for fiscal 2022 was $32.2 million compared to a loss of $38.4 million for 2021 or otherwise favorable by $6 million. The modified EBITDA, which we consider a useful metric in measuring ongoing operations, was at a loss of $15.5 million for fiscal 2022 compared to a loss of $6.2 million for 2021. The modified EBITDA excludes $5.5 million of noncash share-based expense as well as an $8.3 million adjustment to the fair market value of the strategic investment in fiscal 2022, which is attributable for the decreased share price of the common shares of HPQ, which are owned by the Company. As at December 31, 2022, the Company added $3.4 million of cash and cash equivalents balance, and finally, and also of interest, in the beginning of the current month in 2023, we completed a non-brokered private placement, representing 5 million units.

Each unit consists of one common share and one common share warrant of the Company. At this point, I’d like to thank the listeners and I’ll turn the call back over to Steve.

Steve McCormick: Thank you, Andre. In closing, as our CEO, Peter Pascal was quoted in today’s news release as saying, in 2023, PyroGenesis will remain focused on driving major lines of business towards widespread acceptance, moving newer innovations closer to commercialization, and maintaining high margins. The Company will strive to close more deals as a result of the volume of client studies underway. With the introduction and rollout of a refined business strategy, we believe this to be possible. Beyond all else, the Company remains committed to driving shareholder value and looks forward to providing further updates as developments unfold. I want to thank you for joining the call today, and I’ll pass it back over to RodaynaKafal.

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Q&A Session

A – Rodayna Kafal: At this point, we have a short series of prepared questions to which we would like to respond. Over the past few months, we’ve been collecting various questions posted online or sent into the Company via e-mail. It’s important to know that we were not randomly ignoring certain individuals. Many of the questions received was during the period when the Company was undertaking a potential capital raise that was substantially canceled, or during the informal quiet period leading up to financials. The Company felt it’s not wise to respond during this period. Additionally, the Company has received feedback that past call had too few callers asked very few but very lengthy questions. We will instead answer many of those questions today.

First question, can you explain the terms of the recent $5 million non-brokered private placement? At the time of the deal, the share price was approximately $1.30, yet the deal purchase price of this year shares was $1 and the price of the warrant was $1.25. That appears to be a major discount and unfair to current investors.

Steve McCormick: Thanks, Rodayna. A note about that is that many are unaware that the TSX has specific guidelines and approves the pricing for deals, the rules are based on VWAP, the volume weighted average price, over five days in the lead-up to the deal submission to the TSX. In addition, the TSX limits offerings to no more than a 20% discount on the stock price. So, they would have stepped in and rejected any price discount above that percentage. At the time we reserved the deal price with the TSX for the recent $5 million non-brokered private placement, the stock price was hovering right around $1. In fact, the required five-day VWAP was $0.997 or 99.7 cents. Although the stock price increased in a short period of time in the days subsequent leading up to the announcement of the deal, we have no control over market conditions.

And at the time, the price was set with the TSX for the private placement. There was essentially no difference between the set price for the offering and the current price of the stock.

Rodayna Kafal: Are you going to need to raise more money?

Steve McCormick: Market and economic conditions fluctuate. We do not know at this time what the future holds but we’ll always take a conservative approach and do what’s in the best interest of the Company to secure its future while balancing the impact on investors.

Rodayna Kafal: Can you explain the reason behind the CEO’s, Peter’s, regular selling of shares? And then why did you participate in the last five placement?

Steve McCormick: we can share that is important to note that Peter has, for many years, owned nearly 50% of the outstanding shares of the Company. As he is in his early 60s, it’s important for him to be able to diversify his investment holdings for his and his family’s future as everyone should have the right to do. Even with his share selling, he owns so many shares that he still has approximately 45% of shares in the Company. As is often noticed — noted, excuse me, he has sold shares at virtually all price levels, when the stock was high, when it was low, and at various points in between. So, he is by no means cherry-picking. He’s selling opportunities. In fact, as Peter has mentioned several times himself, as an insider of the Company, he is subject to very strong restrictions on when and how much he can sell of the shares.

When Peter does sell shares, he generally does so to do some diversification, to pay taxes, or then to buy options that are about to expire. As to why he participated in the private placement, as of note, most companies is considered a positive that he both wants to and is able to back the Company financially. It also shows even more that he is not trying to back out of the Company through share sales.

Rodayna Kafal: There is a large year-over-year revenue decline. Why such a significant drop in revenue from one year to the next?

Steve McCormick: As we mentioned in the call, there were some general scenarios and some more specific ones. The general reasons include less new project starts in 2022 as a slower pace of technology adoption occurred during the year than was anticipated, particularly with our aluminum sector project prospects who faced a variety of changing dynamics throughout the year that caused them to adjust priorities and financial commitments on the fly throughout the year. Second, we had instances where some projects experienced longer than expected client logistical or project management delays impacting the customers, the Company’s ability to conclude key aspects of projects such as commissioning that would trigger revenue benchmarks further impacting anticipated revenue.

As mentioned in the news release and in the call, much of the Company’s business lines are in early stage of market adoption. Additionally, also mentioned, the Company is selling into industries contemplating significant technological change, especially in regards to fuels, switching to electricity. And with that may come various ramifications, including the possibility for significant time lags as customers conduct lengthy due diligence processes to counter the types of concerns likely seen only during these types of major paradigm shifts. As such, revenues are likely to be irregular and unpredictable quarter to quarter. As for specific issues, there was a decrease year over year in some business lines as production were slowed as the projects themselves knew their completion.

One example is the navy project revenue is lower because the project is nearing completion with only installation and inspection type of work left.

Rodayna Kafal: Does recent or previous government announcements about carbon reduction or clean tech incentives impact the Company?

Steve McCormick: As stated by the Company several times in the past, the Company’s products are not dependent on government incentives. The impact on customers from using PyroGenesis’ products have enough built-in benefit of their own. However, the recent huge incentives announced by the US and Canadian governments are sure to help customers with their clean technology and carbon reduction initiatives. And they certainly stir activity on their behalf. Most companies like to accept government support where possible.

Rodayna Kafal: Can you explain why the was included in your backlog?

Steve McCormick: In our company’s accounting and reporting practices, we include contracts that have been awarded to us and are expected to be executed. We specified many times that the backlog was both for signed and awarded contracts. We considered it a firm commitment when the client awarded us the project after the process. We concluded this in good faith based on client information.

Rodayna Kafal: What measures are you taking to avoid being delisted from NASDAQ?

Steve McCormick: The Company is focused on improving financial performance and making more sales. What the stock price does day-to-day is beyond the Company’s control as there are numerous variables that affect daily stock prices. The Company has 180 business days from the initial notification from NASDAQ to regain compliance at USD1. It can also ask — the Company can also ask for an additional 180 days extension for close to six months. Once the first 180 days expired, we will keep investors up to date as time progresses. So, generally what the stock price does day-to-day is out of our hands but we’re just trying to do better as a company and hope the stock price rises to appreciate those efforts.

Rodayna Kafal: We have received numerous questions about the status of various potential project announced in the past, such as the of $40 million upstream project that the Company was shortlisted for and the aluminum joint venture for dross residues and the building of a factory to process this material?

Steve McCormick: We cannot provide any new information until we receive it. And for these and other similar projects that are asked about, no news is available to share. They are still considered open or ongoing until we are informed otherwise.

Rodayna Kafal: What is the status of the qualification process with the global aerospace company?

Steve McCormick: The process continues, and we are so far successfully meeting the requests of the aerospace company as the requests are provided. We have no further news at this point, but the process continues as planned at the behest of the client.

Rodayna Kafal: The Company has stated several times that its metal powders are the highest quality at a low price. If this is true, why hasn’t there been any sale?

Steve McCormick: The Company is heavily focused on the process surrounding the qualification with the global aerospace OEM. We feel this approach is best for that client and for other potential clients as the rigor with which the process is designed is positively impacting the metal powder division overall, creating a likely better outcome for the future. That process has led us to new approaches and even to a better product. It’s important to know that many of the large companies that would be interested in high quality titanium metal powder of this nature would also want to undertake a qualification process. So, once again, our strategy is to do this current process at the highest possible level to show the marketplace and potentially reduce future qualification processes.

Rodayna Kafal: What is the status of the distribution agreement? The Company indicated they were working on for various parts of the world.

Steve McCormick: Those agreements continue to be negotiated and pursued. The recent hiring of Mr. Olivier Dubois as principal advisor for European operations is part of that plan.

Rodayna Kafal: And what is the status of the site acceptance testing for clients A and B for iron ore pelletization torches, both of which were delayed, but no new timelines given.

Steve McCormick: The scheduling and timelines of the trials are up to the discretion of the clients. We have no material information we can report at this time, but nothing has changed in regards to both clients’ intentions. These trials have not been canceled and are not at risk of being so despite what rumors may appear online at times. We remain excited by their prospects, and we await the results.

Rodayna Kafal: The Company recently announced sales of some plasma torches to the US Navy, three torches for approximately $700,000. This is a steep discount compared to the initial sale price. Why the discounted price?

Steve McCormick: The torches that were sold to the US Navy are in no way comparable to torches sold, for instance, as part of the iron ore pelletization plasma system. These plasma torches sold to the US Navy are significantly smaller in size and not anywhere near the high-power output used for iron ore purposes. Second, the $700,000 was just for the torches and some small periphery items and not for the numerous other large elements that went into the overall Navy’s shipboard waste destruction system such as waste shredders, cooling units, and most importantly, power supplies where a lot of the cost for the shipboard systems stem.

Rodayna Kafal: PyroGenesis share ownership in HPQ has been significantly reduced. What is the strategy there? And is that to continue?

Steve McCormick: The strategy there is for liquidity purposes and cash flow. It’s one of the many tools at the Company’s disposal for cash generation. The Company has a licensing and/or royalty deal with HPQ in some areas that will provide longer term revenue, which somewhat offsets any concerns about lost opportunity from selling HPQ shares. PyroGenesis believes very strongly in HPQ as well as in the technology that the Company creates on its behalf.

Rodayna Kafal: And last question, in the past, you said there were no other PFAS opportunities you were pitching or in consideration for, what happened to those?

Steve McCormick: We’re very aware of the vast opportunity available for PFAS and have faith in our technology’s potential to be utilized in this regard. We continue to pursue opportunities, but are doing so in a cautious meticulous manner, in light of the experience with the initial PFAS contracts. We will update investors as more information becomes available.

Rodayna Kafal: That’s today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.