NanoXplore Inc

F:N13

[Foreign Language] Good afternoon, everyone, and thank you for joining the discussion of NanoXplore's financial and operating results for the first quarter of fiscal 2027. The press release reporting these results was published after market close today and can also be found on our website, along with our financial statements and MD&A. These documents are also available on SEDAR+. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, November 10, 2026, and accordingly, are subject to change.

Such statements are based on assumptions that may not materialize and are subject to risks 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 NanoXplore's annual information form available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR+. On the call with me today, we have Rocco Marinaccio, our Chief Executive Officer; and Pedro Azevedo, our Chief Financial Officer. After remarks from Rocco and Pedro, we'll open the call up to questions from financial analysts. Let me now turn the call over to Rocco.

Thank you, Liam, and good afternoon, everyone. I'm pleased to have you with us to discuss our fiscal first quarter 2027 results. Last quarter, I walked you through our full platform strategy and each of our growth opportunities in detail. Today, I'll keep my remarks focused, what moved in the quarter, an update on our leadership team and upcoming AGM and where our key opportunities stand. Looking at Q1, the results show a strong start to the year. Revenues grew 36% year-over-year to $31.8 million and adjusted gross margin expanded 440 basis points to 21.7% and adjusted EBITDA was positive at $714,000, a $2.1 million improvement over last year. We ended the quarter with $23.5 million in cash and $28.5 million in total liquidity, and our $35 million pipeline of new solutions business launching over the next 18 months remains on track. Free cash flow is in sight.

Just as importantly, we continue to raise the bar on safety. Our total recordable injury frequency in Q1 was 2.0, down from last year's record of 3.1. That's a 35% reduction in our injury rate. In practical terms, more than 1/3 fewer recordable injuries for the same hours worked. This reflects the same operational discipline that's driving our results, and my thanks go out to our team across every facility. Before getting into more detail on the business, I want to highlight an important addition to our leadership team. On November 2, we announced the appointment of Constantino or Dino Malatesta as Chief Financial Officer effective November 11. Dino joins us from CAE, where he spent nearly 20 years in progressively senior finance roles, most recently as interim CFO for nearly 2 years.

Dino is a Chartered Professional Accountant and a U.S. Certified Public Accountant. Dino brings large-cap dual listed public company discipline to our finance function. He will lead financial reporting, treasury, capital allocation, strategic planning and corporate development. His mandate is our mandate, accelerate our path to sustained profitability, improve cash flow conversion, strengthen the balance sheet and put every dollar of capital towards the opportunity that creates sustained shareholder value. Dino and I will also work closely together on Investor Relations. As Interim CFO of a company listed on both the TSX and the NASDAQ, he engages extensively with institutional investors, and he understands what the market expects from a company at our stage, clear targets, consistent disclosure and results that match what we say.

We're fortunate to already have a strong institutional following. And as we move from proving our technology to delivering earnings, Dino and I will deepen those relationships together and keep the market clearly informed on our progress. You'll be meeting and hearing much more from Dino very soon. This appointment reflects where NanoXplore is today, evolving from a growth stage innovator into a performance-driven advanced material company and a world leader in graphene. Dino has a proven hands-on approach to partnering with operations to deliver results, and that's exactly what we need for this next chapter. On behalf of the Board and the entire team, I also want to thank Pedro Azebedo.

Pedro played an important role in NanoXplore's evolution, instilling a culture of operational and financial discipline that has positioned us well for our next phase of growth. Pedro will remain with the company through our AGM, working closely with Dino and our finance team to ensure a smooth transition. On that note, I'd like to invite all shareholders to join us at our AGM on December 10. This year, we're doing something a little different and hosting it at our head office in Montreal. You'll hear directly about our strategy, meet our Board of Directors and see and handle the graphene products that are creating the most value for our business.

Our management information circular was recently filed on SEDAR+ and I'd like to highlight one of our director nominees, Emmanuel Alexu, who holds close to 12 million NanoXplore shares. Emmanuel's nomination reflects something we believe strongly. The people overseeing this company should have a meaningful stake in its success. A Board with real ownership is aligned with you, our shareholders, on what matters most, building long-term value. I look forward to seeing you all on December 10. Turning to business opportunities. A quick reminder of how our revenue mix is structured.

Our solutions business where graphene typically makes up less than 5% of the finished product remains our stable cash-generating foundation. Looking ahead, the real upside lies in higher loading, higher-margin graphene applications, enabled by 2 platforms: our X-Series, which delivers lubricity, thermal and barrier performance and our newer D-Series, which targets electrical conductivity, EMI shielding, UV protection and mechanical reinforcement. As those applications convert into revenue, we expect our margin mix to shift meaningfully. Let me walk you through where they stand. Let's start with insulating films.

In October, we began commercial supply to our lead North American insulating foam customer with an initial 40-ton order of masterbatch at 30% graphene loading levels. We expect masterbatch volumes to exceed 500 tons this fiscal year, and the customer remains on track for roughly 1,000 tons per year in its first full year of production. This is a major milestone for the graphene industry, and I want everyone to understand the magnitude of this opportunity. We're now in discussion with this customer to expand production capacity to meet its growing needs. Several other manufacturers of insulating foams are continuing with plant trials and could begin purchasing this fiscal year. We've also taken this application to Europe with lab and plant trials underway, targeting thermal management and flame retardancy. Moving now to thin films.

Evaluation projects are underway with film manufacturers, converters and end users across packaging, agricultural, industrial films and consumer goods. This quarter, we started a new collaboration with a major global consumer trash bag brand aimed at reducing plastic use, increasing recycled content and lowering material costs. Large consumer brands typically follow longer, more rigorous development cycles, but several industrial customers could commercialize sooner following successful plant trials. The performance of our D-Series product line allows for very low addition rates, supporting higher graphene pricing and margins while still meeting customer cost targets.

In drilling fluids, our partner, CP Chem has shipped NanoSlide samples to multiple prospective customers in North America and internationally, and every customer that has completed lab testing has confirmed the performance advantage. Several large customers have asked for formulation adjustments, faster friction reduction and an immediate boost to drilling speed in specific regions and conditions, and CP Chem is developing an additional product under the NanoSlide brand to deliver them. The sharp cost increases in oil-based drilling is driving demand in lower-cost water-based fluids and high-performance lubricants, the sweet spot of NanoSlide. Well trials are the next step and the key determinant of commercial adoption.

Finally, as a demonstration of our materials innovation, last month at CAMX, we officially launched our own graphene-enhanced sheet molding compound or SMC, making NanoXplore the first SMC material producer in Canada. That's a meaningful position, particularly as customers look to secure domestic supply chains. Our SMC offers external molders, advantages in lightweighting, surface quality and paint ability and it vertically integrates material supply into our own SMC molding business. Internal adoption and external commercialization is expected to begin in our fiscal third quarter. It also underpins our Volvo programs.

The 2 previously awarded programs remain on track for fiscal 2028 at approximately $25 million in annual revenue at maturity. The SMC program awarded in January worth $9 million to $10 million annually at maturity is already generating tooling revenue with part production using our graphene-enhanced SMC starting in fiscal 2028. Turning to VoltaXplore, which continues to execute on its specialty model for defense and dual-use applications. In September, we were selected as a qualified supplier under the Government of Canada's Defence Drone Initiative Marketplace, covering both VoltaXplore's 21700 cells and our graphene-enhanced composite components. In October, VoltaXplore formed an advisory board with Jonathan Blanshay, Founder and Executive Chairman of Galvion as its first member.

Qualification testing with prospective customers is ongoing, and we're pursuing supply opportunities with the Canadian Armed Forces, the Department of National Defense and other federal buyers directly and through module and pack partners with whom we signed letters of intent. To sum up, our solutions business and the $35 million of new business launching over the next 18 months gives us a stable foundation and a path to free cash flow. On top of that, we have a portfolio of high-margin graphene opportunities led by our products in insulating foams, drilling fluids and thin films, all of which are now commercial or have a path to commercialization that we expect to reshape our revenue and margin profile. And we don't depend on any single one of these for our strategy to work. With that, I'll turn it over to Pedro to walk you through our financial results.

[Foreign Language] Good afternoon, everyone. Today, I will begin with a review of our Q1, followed by an update on near-term CapEx spending and conclude with some commentary on our current fiscal year. Total revenues in Q1 were 36% higher than Q1 last year at $31.8 million. The significant year-over-year increase is mainly due to a recovery in our solutions business, which included graphene-enhanced materials and the full benefit of the Club Car business. Adjusted gross margin on revenues from customers as a percentage of sales was 21.7%, an increase of 440 basis points versus 17.3% last year.

The margin increase is due to higher volumes, which resulted in higher fixed cost absorption, and ongoing focus on manufacturing efficiencies and stringent cost controls. However, material costs remain higher than before the U.S.-Iran conflict started. We passed these increased costs to our customers at cost, which protects our gross margin dollars, but negatively impacts our gross margin percentage. Adjusted EBITDA was $714,000, an increase of $2.1 million versus an EBITDA loss of $1.4 million last year. The improvement in EBITDA results from the increase in gross margins.

Looking at the segments, adjusted EBITDA was $818,000 in the Advanced Materials, Plastics and Composite Products segment, an improvement of $2.1 million versus last year and a loss of $100,000 in the Battery Cells and Materials segment, similar to last year. Regarding our balance sheet and cash flows, we ended the quarter with $23.5 million in cash and cash equivalents and $10.5 million in short-term and long-term debt. Our cash, along with unused space in our revolving credit line resulted in total liquidity of $28.5 million as of September 30. Overall, net cash flow during Q1 resulted in a use of cash of $1.5 million.

Looking at the cash flow breakdown, cash flows from operating activities were positive $1.5 million, driven mainly from a reduction in working capital and positive EBITDA. While working capital remains high due to $4 million of tooling receivables, we expect this to be collected before the end of the current fiscal year. Cash flows from financing activities netted to a use of cash of $2.7 million, driven by lease and debt repayments. We expect this amount to be the quarterly run rate on financing cash flows during the current year. Cash flows from investing activities were an outflow of $318,000 related to capital expenditures and was net of $800,000 reimbursement due to the collection of AEPA tariff refunds we collected in the quarter.

Turning now to our near-term CapEx spending and commentary on fiscal year 2027 expectations. As previously mentioned, we expect total capital expenditures this year to be between $3 million and $4 million. Q1 was in line with expectations, excluding the tariff refund, and we expect between $500,000 and $1 million per quarter for the remainder of the year, barring any new initiative not currently identified. For fiscal year 2027, we expect Q2 revenues to range between $31 million and $32 million, which represents an increase of approximately 16% versus last year, and we expect sales to increase from current levels during the second half of the year. As such, we are reiterating our full year revenue guidance between $130 million and $140 million.

In addition, we remain confident to be free cash flow positive for the full year, which will be a significant milestone and the first for NanoXplore. Lastly, on a personal note, last week, we announced the CFO transition plan. I want to reassure all our shareholders that I remain bullish on NanoXplore and strongly believe NanoXplore is in the best position we have ever been. Looking back at over the last 4.5 years as CFO, I can clearly see the progress we have made in building a stronger company with strong foundations for the future and having developed multiple commercialization opportunities that will deliver tangible results very soon.

I will remain with NanoXplore until the Annual General Meeting of Shareholders to help with the transition and have no doubt Dino Malatesta will do an excellent job replacing me. I am a shareholder of NanoXplore and will be cheering the company on from the sidelines as it delivers on its potential. With that, I will pass it back to Liam.

Thank you, Pedro. Operator, we can now open the call for questions.

So the good thing here with insulating foam and thank you for your comments there, it's very different than drilling fluids in the sense that we're replacing another additive and the current customer already has the business. So essentially, the ramp-up will be a couple of loads a month up until we can get up to speed. So we have to ramp up our production. but we'll get up to a steady run rate of 4 to 5 loads a month by mid next year.

Ultimately, the $130 million to $140 million guidance is majoritarily the solutions business. We're going to be -- we're selling today graphene powders and solutions as a subset of that amount. The insulation business is what we see as the most immediate returns that we're seeing in the next few quarters. That's where we're thinking that we're going to start generating sales. In terms of masterbatch versus graphene powders, right now, the insulating foams, the customers we're working on are from -- are on a masterbatch type of product. So the margins will be a little bit lower than just pure graphene powders, but will still be contributing very nicely to the business, but will still remain a subset.

So we're probably looking at maybe $2 million to $5 million before the end of the year that will be contributing coming from these initiatives. And even the initiatives that Rocco was talking about starting towards the end of the fiscal year, it's a part of that $130 million to $140 million that will start up as part of the numbers that are in those numbers, that total. And then growing into '27, '28, fiscal year 2028, these will start to -- will contribute and will continue to ramp up into 2028 and be part of the guidance that we provided during Q4.

Yes. We still are holding to those numbers. Q1 was a little bit soft because as I explained, there was some -- the cost increases are not being done with margin. They're purely cost pass-throughs. So that hurt the percentage. But right now, based on what we're seeing and the lagging effect of cost passing through the customers, we're seeing that Q2 is going to be coming in probably about 100-some-odd basis points better than what we had in Q1 and then continue in Q3 and Q4 as the content of graphene-enhanced products, either master batches and graphene will increase, which will continue to grow that growth of EBITDA margins and not gross margins.

So yes, that's exactly right. We're going to be doing about $64 million, $65 million by the end of the second half -- the second quarter. And then in the second half, we'll be running around 70-some-odd. So that implies around $35 million to $37 million on average for the 2 quarters. The ramp-up from today is really coming from the sales of -- expected sales of insulating foams as we get started on that, that will drive some additional business that will only be showing up in the second half. We're going to be starting in this quarter, but the quantities of revenues will be still quite light in Q2, but it will really be ramping up in Q3 and Q4. So that's one of the initiatives is the customer that we've already signed that we've got orders that will be starting right away, plus the anticipation of additional customers from insulating foams.

We also still believe that the solutions business, the volumes that we see from our main customers seem to be steady and slightly up from where they are today. So that revenue will be coming from those -- from current customers from the solutions business from basically PACCAR and Volvo and such. We do expect some activity for Volvo to pick up some new programs that are starting possibly in a beta type version in the small-scale version during the second half. So these are just -- plus other initiatives related to films, other initiatives related to conductive additives. We suspect that in the second half, we will be getting revenues from each of these elements, which will contribute the quarterly run rate from the low 31%, 32% that we do today to $35 to $37 million in the second half per quarter. I appreciate the color there.

So for Volta, we were approved by the DDI program, right, the Defense Drone Initiative program for Volta and for Nano. So if we talk about Volta in Canada, there were 4 applicants and Volta was selected, which we know -- I mean, VoltaXplore is Canada's choice, if you will. So we have some public announcements that went out in terms of LOIs that are signed. We have some that have not been made public, but we're working with a lot of big -- every major drone producer in Canada, not only drone producers, pack manufacturers. There's a big buzz, obviously, around the defense initiative. It's hard to put a time line on formal POs, James. I could tell you, we're actively working and we're actively committed now to growing Volta in the right market in the right space. Volta today, just as a reminder, can do -- it's a pilot scale facility can do upwards of 100,000 cells, right? At some point, we're looking to get Volta to that next level where it can fully supply all of Canada and more if needed.

Yes. So I mean, capacity expansion, what I'm referring to there isn't on the graphene side, it's more on the masterbatch side. So we have 2 extrusion lines here that are going to be quickly filled with this customer. So that's the capacity expansion we're looking at. We're looking at adding more masterbatch capability, which is going to allow us to sell more graphene at the end of the day, right? Looking at -- when we look at our pipeline of foam producer -- I mean, foam applications and potential customers, the volumes, they get up there, right? They start to make a massive dent in terms of our overall graphene capacity. So not ready to give you any prediction or capacity number yet, but I would say expect that as we start to ramp up.

So we've been working in foams for 18 months to 2 years. Now we talked about foams previously. And I'll tell you, we're working with different size and customers. Previously, we were working with -- and we still are working with large names. I mean, we said in the previous call Fortune 500 names that everyone will know. They tend to take longer to commercialize only because of their testing cycles and their, I guess, their levels in their company. The customer that we have commercial orders with and we're going into production with smaller name, big in the size of the graphene opportunity for us, and this is just one facility in Canada, right? So as different companies start to commercialize, and we see them upwards in 2027 and 2028, we have a nice pipeline of potential customers. We expect those numbers to continue to grow.

There's 2 value props that we laid out. The North American one, the opportunity that we're commercializing here is an increase in our value of foam, right? Just how graphene interacts with the foam. Again, it has to be properly dispersed, right? There's this misconception that you sprinkle graphene powder into X market and you get all these magical benefits. You do get the benefits, but you have to know how to disperse the powder. You have to know what carrier resin to use. It's -- we've got a massive R&D team here that has been working extensively on this opportunity in the foam markets where we now own our own data. We understand how graphene interacts with foam, right?

So the dispersion plays a massive role. We have different types of graphene now, so not to disclose which type we use, but it's relevant for the end user, right? We have different grades of product now that interact in different markets. But have a 2-dimensional material when dispersed properly basically creates almost like a wall, if you will, it doesn't allow heat to transfer through. So it increases your value in foams.

Well, when we provided guidance, we already saw that insulating foams were passing a certain level of milestones internally and with customers. So this opportunity that is going commercial right now, we had a pretty strong feeling it was going to happen. So that was already part of the 130, 140. What's part of the 130, 140, as I explained earlier, is also the expectation of some others that are going to start. That's where there's risk. They can delay. We don't know what we don't know today. But when it comes to possible delays, at least on the current customer, we're starting to ramp up production.

We're increasing the amount of loads that are going to be shipped on a regular basis. If the number of loads that is ramping up over the coming months, if that slows down for whatever reason, that could cause a delay. But right now, we don't see any issues from that perspective.

Here's what I'll add, Michael. I mean when we look at our revenue number, right, we don't -- we are focused on it, obviously, on growing revenue, right? But if a customer X that has a 3% to 4% graphene loading level has a hiccup and it's beyond our control in a transportation part or something, right? Yes, it's a blip in the road. But I mean, the magnitude here of graphene now being commercial in an application that's basically outside of our control. This is the first one where we didn't acquire a company and basically put graphene in to demonstrate the value. I mean this is a massive -- and I said it in my script, right?

This is a massive tipping point for the graphene industry as a whole, where we see graphene now making meaningful impact and has a meaningful value in an existing market. So it's a massive, massive opportunity. And again, one customer in Canada takes more graphene than I don't know if some of all the other graphene companies that are out there today. And this one opportunity is more than all of that powder put together. I'll bet on it, right? So it's a massive potential and a massive breakthrough for the industry.

Thank you Michael, appreciate it.