NanoXplore Inc

TSX:GRA

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the Q4 2022 NanoXplore Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Martin Gagné, Director of Investor Relations. Please go ahead.

[Martin Gagné, executive]

Good morning, everyone, and welcome to NanoXplore's fourth quarter conference call. Today, I'm here with Soroush Nazarpour, our President and CEO; and Pedro Azevedo, our CFO. We will start with our prepared remarks and then Q&A. Please note that our discussion will include estimates and other forward-looking information, which our actual results may differ from in the future. We invite you to review the cautionary language in yesterday's earnings release and in our MD&A regarding the various factors, assumptions and risks that could cause our actual results to differ.

With that, let me turn it over to Soroush.

[Soroush Nazarpour, executive]

Thank you, Martin, and good morning, everyone. Before discussing our results, I would like to start the call with our asset purchase acquisition of XG Sciences. We are very happy with this transaction as XG was a formidable competitor of ours, and we have the utmost respect for the team, the technology, and patents that they have assembled.

With this transaction, we acquired close to 40 patents covering graphene production and applications. With these patterns, we are broadening our scope and accelerating our downstream market access. Moreover, this patent portfolio includes 7 patents on graphene silicon composites, which protects our graphene silicon composite nanotechnology. Silicon-based analysts play a crucial role in the current liquid electrolyte. But will play an even bigger role in the next-generation solid-state patterns, where silicon will act as an active material of the end.

Graphene will act as a barrier to reduce the silicon from swelling thus improving the cycle life of the patents. Now that we have all the IP protection that we needed, we intend to build a dedicated R&D facility for the next generation of [ Valaris ] and build a silicon graphene pilot manufacturing plant with a starting capacity of 100 to 200 tonnes per year during 2023.

Moving to management. We made some changes during the quarter. During his time at NanoXplore, Luke played a crucial role in building a strong foundation that the company sits on today. Luke was a valuable team member and will be missed for his softness and keen business sense. He has stayed on until September 1 to enable a smooth transition and is currently working full-time at Xplore to help steer the ship to a very promising future.

In addition, I would like to welcome Pedro to our team as CFO. Pedro was CFO of a large division of Target Estate, a French global flooring company, for the past 7 years. He brings a strong manufacturing operation and M&A experience and expertise. He has great business understanding and strong interpersonal skills, making him a real asset for NanoXplore. We are very happy to have him on the team.

Switching gears to our results, we are very happy with our performance as we finished the year with total revenue of $94.3 million, beating our internal forecast of $90 million. This enabled us to achieve a positive quarterly adjusted EBITDA to finish the year. Even though we expect to see further growth in our revenue during this fiscal year, we'll be increasing our expenditure on R&D certifications, engineering, and IT. And we'll invest on several growth initiatives, details of which will be covered in our 5-year strategy presentation.

Our focus is to grow graphene adoption while building a strong foundation to grow upon. We have a high conviction in our graphene potential, and this under material will no doubt power the 2 mega trends of the next 2 decades, which are the energy transition and sustainability. NanoXplore is playing in 3 key growth vectors that will enable these mega trends. These vectors are battery materials, composite light-weighting, and specialty compounds.

Let us start with the battery market, which is the first growth vector program. Lithium-ion batteries are central to the success of transportation OEM electrification strategies, in terms of improving the driving range and price competitiveness. Carmakers and battery manufacturers are aiming to improve battery quality and bring down prices to below $100 per kilowatt hour, a rate at which EVs can compete with traditional internal combustion. However, battery technology and prices are not the only factor in play.

As EV demand rises, it is becoming especially critical for manufacturers to manage the procurement and production of batteries. There are serious questions over whether supply will keep up with demand across the battery supply chain. From experts such as Simon Moore, Head of lithium-ion battery data firm Benchmark Minerals, have referred to the push for regional battery production and supply chains as an "arms race." Logistics and supply costs play a key role here as batteries are heavy, costly, and complicated to move because of varying regulations around the transportation of hazardous goods.

Carmakers are organizing supply chains around local lithium-ion battery manufacturing in all regions where it is feasible, in part to keep logistic costs to minimum. Although values are generally cheaper to manufacturing in low-wage regions in Asia and specifically China, supply and transport costs are likely to eliminate that cost advantage when shipping to North America, for instance. Hence, we believe the lithium-ion battery industry becomes regional and consequently cathode and anode material production facilities will become regional as well, all to ensure visibility and security of supply.

The battery ecosystem is a large market and for every megawatt hour, we will need around 1,000 tons of anode active materials. Based on BMI projections, we could see 700 megawatt hour of battery capacity in North America by 2031. Hence, we expect around 700,000 tons of demand for anode battery materials by 2031. While the current supply of anode material in North America is almost nonexistent.

As will be shown in our upcoming 5-year strategy presentation, we're addressing this by planned capacity expansion for our graphene and anode material production, as well as by setting up a graphene-silicon composite additives production facility. Using graphene not only as conductive additive in anodes and cathodes, but also as an active material of anode. That is the main driver for us. Graphene is known to be material that generally doesn't liquidate as graphite. And because of higher surface area, it will show a very short life cycle in balance. We have addressed both these issues, and developed a process where we can use graphene as active material of anode to replace liquid graphite partially or entirely. This is obviously a big deal for us and for the industry. We will provide more color about this in our 5-year strategy presentation.

The second growth vector is graphene-enhanced composites. Light-weighting composites will play an important role in EVs as they're approximately 30% heavier than internal combustion engine vehicles. For instance, in the Tesla Model 3, the battery represent 25% to 30% of total vehicle rate. One of the key pain points for consumers when they buy an electric vehicle is the vehicle range. Thus, reducing the weight it is paramount for OEMs as it will improve the battery performance.

We have launched our graphene enhanced sheet-molding compound SMC composites with 2 of our large commercial OEM customers, and this validates our previous acquisitions. By adding graphene to SMC, we reduced the weight by up to 25% versus other SMC component parts, improving the surface finish as well as safety factor. We are seeing strong interest from other OEMs for our graphene black SMT solutions for exterior parts of the vehicle.

Moreover, battery enclosures -- excluding the cells -- are heavy and could weigh between 150 to 200 kg. By using a graphene-enhanced SMC composite, we can lower the weight of the battery pack and benefit from the upcoming EV adoption. As we head towards the next generation of batteries, reducing the weight of the battery enclosure will be paramount. We are well positioned here as well. Therefore, light weighting will be a key contributor in the next transition and our graphene-enhanced composite solution will help lower the weight of battery enclosures; thus improving the range of EBITDA.

The third growth vector is our graphene specialty compounds and applications. We believe that we cannot have a sustainable work if the backbone of our products is not sustainable. Our flagship product, graphene black, is a green material produced through a water-based exfoliation process and produces 7 times less CO2 than competing carbon material. We are seeing more and more companies approaching us for more sustainable products, and it shows in the expansion of our active fund. A few segments have emerged where our product is functioning exceptionally well. One is in cement, where small loading of our graph in showed a tangible increase in the strength.

As we continue validation with several cement manufacturers, we believe this would be a large segment of the graphene market in the next 5 years. To accelerate this, we did set up a small cement lab within our R&D space in Montreal, which helped us to work on cement formulations in-house along with the development currently being done in our partners' laboratories. This accelerated the R&D process and technical results are quite interesting.

Our cement partners are showing improvements in strength from 15% and up to 70%. Even though these numbers have been reported before in scientific articles by a few other graphene companies, we believe our large volume and low-cost graphene production capabilities positions us particularly well to supply the cement market. Currently, we are working to replicate this performance in the industrial cement production facilities of our partners, and continue the validation process.

Another one is thermoplastic compounds, which have been successful in a few areas such as graphene-enhanced nylon and polypropylene applications in transportation; and graphene enhanced polypropylene application pipes, join membranes, and rigid plastic package market. We will continue developing these products with end users and partner up with intermediaries, such as plastic compounded formulators, to scale our production capabilities.

Another one is polypropylene in relation to the construction and transportation market. As we add graphene into the mix, we are seeing a tangible improvement in relation to the efficiencies of these spots. We have been developing these solutions for over 3 years and believe this can also be a large segment of our future self. We're advancing with several large chemical companies and expect to see revenue from these products next year.

Turning to our funnel. Our active funnel is still growing with more than 200 accounts. Our late stage funnel, which means we should see revenue in the next 24 to 36 months, has also grown and includes more than 50 caps. Some accounts are reaching the commercial status and some are continuing with the pilot testing. But overall, our active base is steady and growing.

As we said several times in the past couple of years, graphene is a new material, and we are competing with a product that is entrenched in people's minds. Consequently, patience is important. This is a large market with more than 1 million tonnes of total addressable market size and a slew of applications. We believe that we will gain market share over time, as we can offer a more sustainable and a better performing solution. It's important to note that the graphene sales cycle is long and complex. Several milestones have to be reached in order to see a widespread adoption of graphene in several markets. First is the availability of supply. It's important to demonstrate that the technology has reached a level of maturity that is consistent, and reliable supply of graphene is available in an industrial setting and the cost that is acceptable.

We have already proved that with our 4,000 metric ton per year graphene in production facility in Montreal, which accounts for around 40% of global capacity in production on graphene. Second is graphene certification as a substance. Any new material requires certification in order to be produced and shipped across borders. Each jurisdiction has its own requirements. U.S. Environmental Protection Agency, Environmental Canada and REACH in Europe are examples of these entities, which aim to provide a high level of protection of human health and the environment from the use of chemicals or substances. We have already achieved this certification in U.S., Canada and Europe.

Tariff is the production validation. These include technical performance, financial validation, sustainability and life cycle analysis, processability, logistics, and more. Different players in the supply chain are involved in validating all these requirements. OEMs, molders, and formulators, are all involved in these steps, making it a long process and highly unpredictable. We have been successful in a few applications and continue this with many more.

This is our sales funnel that we talked about earlier.

Fourth and last is product level certification. Maturity of products and applications are certified through ASTM or ISO or directly by OEM. For instance, we're a new additive to be used in plastic pipes, corresponding ASTM and ISO certifications have to be modified. We're actively working on this now. For instance, we recently modified the Canadian pipe certification to include graphene as an additive beside Carbon Black and continue to work with related associations to modify ASTM certification. The cumbersome process requires many players in the supply chain of each market to agree with adding a new material. In some cases, our customers are driving these modifications in the respective markets, which accelerates this process. Nevertheless, it has to be done and will continue to do so.

To conclude, we are developing the graphene market, and we'll continue collaborating with our customers and partners while acquiring key assets at visible cost as demonstrated before. We would like to see more products in the market with our graphene and accordingly expect to keep seeing revenue growth. This coincides with investing on many initiative in our business, such as streamlining manufacturing and operation by using robots, and upgrading our global ERP system. And also investing in R&D and engineering to increase the capacity of graphene and anode material production itself. All in all, we will continue to expand the reach of our graphene while focusing on building a strong foundation to our company.

And now I will pass it to Pedro to discuss our financial performance.

[Pedro Azevedo, executive]

Thank you, Soroush. I'm very happy to have joined the NanoXplore team. Having only been here for a few weeks, I can already see that it is an exciting company with strong competitive advantages and a strong and promising future. I will begin with our financial results and then discuss our balance sheet.

First, some housekeeping. As the new CFO and looking at industry practice, I have determined it best to remove foreign exchange variations from our adjusted EBITDA on a go-forward basis, as I deem it not to be an operational line. In the MD&A, we present the last 4 quarters calculated under this methodology.

I'm pleased to report that we finished the year on a strong note, and as Soroush mentioned, we were able to beat our $90 million full year total revenue guidance provided earlier in the year. For Q4, our total revenue was $28.1 million, meeting our implied Q4 revenue of $24 million, which was up 35% year-on-year. The higher revenue versus our guidance was driven mainly by better pricing and a better product mix. Our Q4 gross margins, excluding depreciation and amortization, was $4.7 million: an increase of $2.6 million versus last year. And gross margins expanded by 640 basis points to 16.8%, which was driven again by better pricing, higher margin product mix, and better cost control. We generated 113,000 positive adjusted EBITDA in the fourth quarter versus minus 3.1 million last year. The strong improvement was mainly attributable to higher gross margins and lower administrative expenses.

On the balance sheet, we ended the year with $51.2 million of cash and cash equivalents, and $7 million of available space on our credit line for a total liquidity of $58.6 million. Our total debt stood at $14.1 million and was comprised of $9.5 million of long-term and $4.6 million of short-term debt. As the pandemic unfolded, we took the decision to pay down our debt and have since repaid $8.1 million over the last 2 years to be in a better position exiting COVID. Given the recent increase in the cost of borrowing, we are now in a stronger financial position.

With that, I'll give this line back to Soroush for some final thoughts.

[Soroush Nazarpour, executive]

Thank you, Pedro. I would like to end our prepared remarks with these comments on our upcoming 5-year strategic plan that should be coming out in the next couple of months. We have been working hard for the past few months preparing for this comprehensive plan. For that reason, we'll give out our outlook for fiscal year '23 after the release of the plan, which would be during our Q1 call.

With that, I will give the line back to Martin.

[Martin Gagné, executive]

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

[Operator]

[Operator Instructions] Our first question will come from Amr Ezzat of Echelon Partners.

[Amr Ezzat, analyst]

This is Amr from Echelon. Soroush, Pedro, Martin, congrats on the quarter. My first one is on the Canuck acquisition. I'm actually pleasantly surprised with the performance. Correct me if I'm wrong, but it seemed like it's close to $7.5 million in sales. Can you give us a bit of detail as to what is happening there? Are there one-off contracts which are driving that? Or do we build growth out of that $7.5 million?

[Soroush Nazarpour, executive]

Sure. Canuck, historically, was not doing as much. So, the increase that we're seeing is related to the product mix. We have a group of products in transportation that generally tend to do higher gross margin versus more of the consumer products. So, by including graphene-enhanced products in them, we have been able to absorb business in transportation. We really think that this trend point will continue in the next couple of quarters still.

[Amr Ezzat, analyst]

Okay. That's good to hear. I think the funnel numbers you gave in your prepared remarks haven't changed from last quarter, and I certainly don't expect them to change every quarter. But I'm wondering if you could tell us how conversations with customers are evolving since last quarter. Do you still expect to be capacity constrained by the end of next year?

[Soroush Nazarpour, executive]

Yes. We are pretty reluctant, these days, to accept a new development partner in R&D. I think we are at our max in terms of co-development with our potential future customers. We'll try to actually make the funnel even more stable and hopefully smaller as we go forward. It's more focused on the areas of interest that we disclosed in the call. I would say that there is no change in our forecast. We still believe that new capacity is needed. And hopefully, within our strategic plan, you will see the details of expansion of capacity of graphene and anode material. So yes, the answer is yes, we're still believing that there would be constraints in our production in the timeframe that you mentioned.

[Amr Ezzat, analyst]

Just on that last part of your answer, you said we've seen in the strategic plan the capacity expansion. I think last quarter, you were speaking to a second graphene production module with a target production in early 2024. Are there any changes to that timing or potentially to the size of the module? Can we see it maybe as 2 modules that's are 8,000 instead of one that's 4,000?

[Soroush Nazarpour, executive]

You've got to wait for the plan to come out. But yes, there is a chance that we expand the output of the capacity to more than one module. But the details of which will be in the strategic plan.

[Amr Ezzat, analyst]

Understood. Well, that's positive to hear. Then if you'll allow me one last one. On the silicon graphene anode material facility, you spoke to the 100 to 200 tonnes per year. How much will that cost you? Does that sort of cover all your needs for the 2 gigawatt hour facility?

[Soroush Nazarpour, executive]

Well, the majority of the cost of CapEx is already covered through the acquisition of XG. So we are repurposing the mechanical assets that we acquired from XG and using them for production of graphene enhanced silicon compounds. There is still a little bit more CapEx to be added, but that would be pretty minimal. And in terms of the need, we think that based on the customer list of Volta currently, the loading level of graphene silicon would be lower than what we see in some of the consumer electronic applications.

So the fact is that we think a loading of 0.5% to 1% of that graphene silicon additive would be enough for the current needs of Volta. Inherently, put a total annual need of close to 100 tonnes per year. 100 to 200 tonnes per year. So that's where the numbers are coming from. Having said that, we hope that we can continue the development with a bunch of solid-state guys that we work with. They need lower amounts, but that facility will produce enough to continue that development as well.

[Amr Ezzat, analyst]

Great. Then do you guys have an update on the financing for the battery plant, or at least some visibility as to when we could expect you guys to announce something?

[Soroush Nazarpour, executive]

Yes. As you remember, we have discussed in the Battery Day that there are 3 criteria that have to be met for us to continue the Volta process. One is validating economics. Second is financing. And third one is life selection. I mean, you really can put them into one particular condition, and that was the variation that comes to our decision based on the U.S. inflation Reduction Act, where the U.S. is providing special incentives to the battery makers to place the plant in the U.S. It was less of a discussion of financing a project by itself.

It was more the discussion around how these act will impact the battery cost and prices going forward, right? We are continuing the discussion with the Canadian government as well as the Quebec government to see how we can be sure that going forward, our cost of production is competitive to plants in the U.S. It was less of a question of if we can finance it or not. We're now working a lot more on the OpEx side of the battery plant. So a long answer to your question, but we are hoping to see updates about the project within this calendar year.

[Amr Ezzat, analyst]

Okay. No, I appreciate all this color. Congrats again. I'll pass the line.

[Soroush Nazarpour, executive]

Thank you.

[Operator]

And our next question will come from Rupert Merer of National Bank.

[Rupert Merer, analyst]

I'd like to start with the silicon graphene anode technology from XG Sciences. If you look at the patents, can you give us a little more color on the importance of those patents and how they relate to the anode technology that you're working with?

[Soroush Nazarpour, executive]

Yes. I mean, without disclosing exactly how we produce our silicon graphene, I would say our process includes a mechanical step first and a more physical step second, okay? It's a 2-step process. We have some level of protection already in the second part of our production, but the first part is something that we were pretty worried about in the future as we had a much weaker intellectual property protection there. The acquisition pretty much came to support the IP to the mechanical side of the process to produce graphene and silicon.

That's where you mix scrapping with silicon pretty much. The patent that XG brought it is a very general patent. It's more a borderline and material patent than a process patent. So as a result, the scope that is covered is pretty wide. And we believe that many of the graphene silicon mix producers for anodes are going to infringe that patent. As a result, we took that patent over. That gives us protection going forward to have pretty much all the steps of production of graphene silicon protected by intellectual property.

[Rupert Merer, analyst]

Given the potential importance of this pattern, were you surprised that you were able to acquire it at the price that you did acquire for?

[Soroush Nazarpour, executive]

Yes. It's a much longer process and there are much more complicated negotiation steps there. But we can say the fact that we paid a good price should not undervalue what we acquired.

[Rupert Merer, analyst]

Great. And with XG, you also mentioned that it could give you access to the downstream markets. Does that go beyond battery technology?

[Soroush Nazarpour, executive]

Yes. In the remarks, I talked about polyurethane foam products. We had a pretty similar situation there where we see quite a lot of potential for the growth of our product, but there was an old patent of XG, which is pretty much the patent that covers the products they were selling to Ford. And that patent was inhibiting us from really going after it. More widespread -- that's what we're doing now. So we acquired XG. That patent also came, and that will help us in our polyurethane foam part of the business. This is the first time we're talking is pretty much because of that other IP acquisition that we did.

[Rupert Merer, analyst]

And with XG Sciences, were there any key employees that come along with that acquisition? Anything that it will do to the cost line a NanoXplore?

[Soroush Nazarpour, executive]

When we acquired XG, it had already ceased operations. There were no employees that joined the company. Having said that, we continue to discuss the key employees to be on short-term consulting contracts with us. But we believe that there would not be an ongoing cost from that acquisition.

[Operator]

And our next question will come from Michael Glen of Raymond James.

[Michael Glen, analyst]

Sorry, I missed my name. Just to go back on XG. Maybe just spell it out a little more, in a little more detail. With the R&D facility you're planning to set up with the XG IP, how exactly does that differ from what you're currently doing at the pilot facility here in Montreal?

[Soroush Nazarpour, executive]

Yes. XG invested a lot more on earlier-stage R&D activities. Our focus has been more on later stage; the big D in R&D, right? So we are bringing that lab equipment. They're pretty expensive lab equipment in general. You hardly see this lab equipment, even in the universities. Which makes sense why the company has suffered. We brought those lab equipments. We're bringing those lab equipments to Montreal. And we are looking at a little bit longer-term R&D activity on batteries now. We initially started our development in solid estates.

We moved our technology to be more adaptable to liquid electrolytes, so it's closer to revenue. But now that we're getting enough resources, let's say, from that acquisition, we are focusing a bit more on solid estates and hopefully, on sodium ion batteries. Now, these 2 -- they are very early stage. We're looking on, let's say, 10 years or plus horizon on seeing activities. But we believe that the battery market is moving towards solid estates and, afterwards, to sodium ion battery. So that's what we meant by putting that battery. It's a little bit longer term than what we normally are doing now.

[Michael Glen, analyst]

So that development, that additional program, you will locate that with your existing pilot here in Montreal? Is that the plan?

[Soroush Nazarpour, executive]

No, no, it's in a separate location.

[Michael Glen, analyst]

It's in a separate, okay. And then, obviously, we can all see that there was a fairly notable list of investors and customers on the XG side. To what degree do those legacy partners or customers play a role with NanoXplore going forward?

[Soroush Nazarpour, executive]

Yes. Good question. So, you see some big names like Hanwha, Cabot, Samsung, and Dow Chemical in the list. Of course, of the relationships and discussions, some were already known and some will continue. These were more strategic investors than customers. Of course, they bought products from XG, but the core for us is future development with these partners. And the list is more than the names I mentioned. It is a component for us. Of course, it was not the main reason for us to acquire XG. But these partners will definitely help us going forward in some of those activities, especially on the battery side.

[Michael Glen, analyst]

Okay. So some of those partners do remain actively engaged and interested in what you're continuing to invest in.

[Soroush Nazarpour, executive]

We certainly hope so.

[Michael Glen, analyst]

Okay. And then this is a question that I receive frequently: but when we look at your top line right now, and those legacy acquisitions made in the past, when you bought those companies they were not using graphene. So when we look at your top line right now, how much of the sales mix or products sold now include graphene?

[Soroush Nazarpour, executive]

I can tell you. I mean, market likes to separate the graphene and legacy for us. It's very integrated. Almost all our SMC activities, for instance, includes graphene. We have graphene accepted and now included in the resin transfer molding products. We have graphene in 100% of our Winnipeg facility products. We have graphene in the Canuck already. Listen, the reality is that we include our graphene, and we did this acquisition to pretty much seed the market. We have been very successful.

I mean you see the SMC activities and composite lightweighting is a result of all the acquisitions that we did. That's a good growth avenue for us in the next 5 years, which you will see in the plan. I would say separating it in the way of legacy business and graphene business is just irrelevant in this case. We acquired these companies that were not using graphene. Majority of them are using graphene in the majority of their products. That's what I can say with certainty and the customers are liking what they're seeing. So, that's why they're purchasing more and they're giving us more orders. As an indicated approach, graphene is in the majority of those products already.

[Michael Glen, analyst]

And final one on my side. Are you able to indicate what the capacity utilization was on the 4,000 metric tons in the quarter?

[Soroush Nazarpour, executive]

Yes. We have avoided answering that question, and we're going to continue doing that. Again, we go back to the questions that we answered. Still, we see the capacity utilization and the limitation of availability of our product by the end of next year, early 2024. So that translates to full utilization of the plant by the time, right?

But we are not going to define it quarter by quarterly. What we see is 4,000 tonnes. Even though it looks big for the graphene market, but comparing it to what we're replacing -- the carbon black market -- it is just peanuts. It is very small, and we should start looking at much larger volumes than a single module.

[Operator]

And our next question will come from George Gianarikas of Canaccord Genuity.

[George Gianarikas, analyst]

Just very broadly, have you had time to study the Inflation Reduction Act? And if you have, I'd be curious as to whether you could share some thoughts as to how that changes some of the investment decisions you have to make.

[Soroush Nazarpour, executive]

Great question. So yes, we were looking at this Act for a couple of months before it even got approved, and we had ideas about it coming. What we know today is that the Act is an advanced manufacturing credit. A part of that act is covering pretty much all the supply chain of the EVs. We break it into 3 parts: the critical material supply, cell production, and EV production. In these 3 parts, there are incentives for the supply chain.

In 2 of them, which is critical materials and EVs, somehow Canada is also included with the U.S. and Mexico. So in a sense, the countries that they have within the USMCA are within that credit. Though when it comes to cell production, it is really dedicated to the battery facilities in the U.S. And yesterday, we heard from Tesla about potentially moving accoutrements from Germany to U.S. to start producing and benefiting from the Act.

It's very hefty in terms of payments. The government is covering $35 per fluid hour of battery produced for the first 5 years, and that continues through a tax incentive afterwards. You can say that the government of the U.S. is paying for the CapEx of the battery facilities, and also covering the borrowing cost for bridging the financing. It's a pretty strong program.

Obviously, when it got approved, it absorbed a lot of activities and new facility announcements in the U.S. It's also impacted on the price of equipment to build the batteries. This is really driving the supply chain of the United States on battery production. You can imagine this type of impactful program -- it impacts the capital expenditure first, but also impacts the cost. For us, we were already in a position where we've received interest from the governments of Quebec and federal to build the plant in Canada.

Now what you're looking for is how the cost of production of batteries will evolve in the next couple of years because of this incentive and continuing in Canada, which is exactly our desire. Is it going to be competitive with the U.S. counterparts or not? Great question. Supply chain is really evolving fast on the batteries. And we think that these type of programs will really accelerate battery production.

Having said that, even after all the announcements, we think that the total announcement of the giga factories still quite lower than potential demand coming by 2030. So, we're still pretty bullish about supply limitation. But the equipments are getting more expensive and OpEx at the cost of production is most likely coming down because of this.

[George Gianarikas, analyst]

You said that you saw an immediate change in the price of equipment right after the announcement. Did I hear that correctly?

[Soroush Nazarpour, executive]

Yes. So equipment suppliers quickly saw a surge of demand for the equipment. They pretty much jacked up the prices overnight. So, many of the budgetary codes we had in Volta are not valid as the cost of that equipment is going higher. Which is, again, because they have to put new capacity in place. Panasonic just announced 2 new facilities with 50 gigawatt hours each. You can just imagine how much more battery production equipment is needed going forward. And the demand goes up, supply is limited, the price goes up pretty fast.

[George Gianarikas, analyst]

Interesting. May I ask a little bit about the acquisition of XG. I know you've already had several questions. But I'm curious about regulatory approval. Do you see any issue there given that the patents you're acquiring here are critical and how that process should play out?

[Soroush Nazarpour, executive]

You mean antitrust regulatory approval?

[George Gianarikas, analyst]

Correct.

[Soroush Nazarpour, executive]

No, I mean, the transaction is already done. There are relationships. When you look at the regulation, Canada is within the list of friendly countries. So it's less stringent on those type of technologies. The transaction is already done and the assets are already being transferred. The ownership is already transferred. There is no risk on that side.

[George Gianarikas, analyst]

Understood. You mentioned Ford as a customer for XG. Are there any cross-selling opportunities here? Are there ways to deepen the relationship over time?

[Soroush Nazarpour, executive]

Well, in the case of Ford, they looked at 2 suppliers for the graphene. That was us and also XG. We've already been a supplier. I think for a couple of main customers of XG -- we won't continue their products because either the volumes are too low, or it's outside of our target market. But some of those ones can be continued really with our graphene black product. Of course, when you change the graphene from one to the other, there is a certain period of validation needed. But in general, XG sales were shy of $2 million. So it was pretty low anyway.

[George Gianarikas, analyst]

Got it. Maybe you could just focus specifically on the quarter. I think during the call, you mentioned that some of the positive impact you saw was mostly pricing and mix shift related. Can you give us a little bit more detail on what exactly you saw during the quarter? What was the mix shift specifically that you experienced?

[Soroush Nazarpour, executive]

Yes. So generally, when we look at the composite activities, we have better productivity in our SMC products than RTM. We have attempted to have a better gross margin there, as well as those products which include graphene in them. So they show better gross margin. That's one side of the story. Direct graphene cells. We put all those graphene and graphene enhanced composite products within the product mix.

But when we talk about price increases, it definitely comes because we have partially transferred the raw material price increase to the customers. So that brought the price increase as well which we mentioned there. So, a mixture of increasing the selling price because of raw material price increase and also the type of products that we're selling. As we sell more graphene in-house product, the more gross margin we see in the product. I'm generalizing it, but that's normally that what we see in our business.

[Operator]

And our next question will come from MacMurray Whale of Cormark Securities.

[MacMurray Whale, analyst]

I'm wondering if you could talk a bit about competition. In the graphene space, as this takes time to get adoption, do you find that the competition is getting stiffer?

[Soroush Nazarpour, executive]

Not really. I mean, the acquisition of XG. The way the market translated that, the graphene-focused market, were the first signs of consolidation. When you enter that stage you have all this popcorn of start-ups that are already going through a consolidation. So you see lower number of competitors. But as a result of that, you're expecting to see larger sized competitors to us. Right now, this trend just started. We don't yet see the appearance of a large competitor for us. XG were actually was a very important competitor to us. They were doing business in North America, very close to us.

So at this stage, we have a pretty good grasp on hold North America when it comes to graphene. But we don't yet see this happening in Europe. And the events happening on the graphene in China -- just nobody knows. So there's a pretty different part of the world in China. We know there are a ton of different companies. They're doing a lot of different things. The information is really limited and the claims are very strange all of the time. So we just put China aside. We don't see consolidation happening in Europe yet but we expect this to happen in North America. I think we already dominated the graphic market in North America. We will have the majority of the North American market of graphene.

[MacMurray Whale, analyst]

Okay. When you look at some of the end markets that you've targeted -- you talked in your prepared remarks about certification and validation, that type of thing. In certain markets, that's been a barrier to adoption. In the EV space, do you face similar things? Or is it really product certification, which is all led by the customer anyway? Is that a bigger barrier than, say, standards?

[Soroush Nazarpour, executive]

Yes, you're absolutely right. For battery materials, especially for new ones to get into the battery market, certification of the product is important. Normally OEM does that. That's pretty much the business case behind Volta for Nano to start with. So we wanted to use Volta as the first customer of our battery material. It will be a validation customer for us as well. So that helps.

When your product has already been used somewhere in the world by a battery maker, and the product is already successful in the market, you tend to get past the stage of product certification faster, right? That's the concept. But you're absolutely right. The certification either comes from OEMs. Like on all the auto applications, OEMs are certifying their products. And on generic markets, like pipes, membranes, and you name it, those are normally covered by ASTM and ISO.

I mean in the United States, it's more ASTM. So depending on the market, we have to either certify our product with the OEM or with the ASTM. You see, for instance, we have content with Ford. And our product has already been certified with Ford. So that opens up the applications for us in different parts of that company, and we can bid for different programs. That's how it works with the OEMs. When you go to the ASTM, it's really market specific.

[MacMurray Whale, analyst]

And do you find that the OEMs in general are in other areas, let's say -- not in batteries, but in the traditional business -- it takes them a long time to adopt something new. And given the amount of investment in battery facilities, what's your view on adoption of silicon enhanced anodes and solid estate? Is that really an opportunity even in this decade? In your view, like I'm curious about what you think the automakers reception to bleeding edge technology is.

[Soroush Nazarpour, executive]

Yes. So look at our battery material offering, it's going to be pretty much 3 products. One would be conductive additive, right? We can add that to the cathode side and also the anode side. This product is normally replacing conductive carbon black. And loading levels are 1% to 2%. This is a much shorter easier path to the market, right? For instance, the killer application for carbon nanotube is the conductive additive to the cathode. And we see the same type of performance, if not better, by adding our product to the catalyst. For instance, you have expansion of capacity in the LFP. These things are lower approval processes. It's actually easier to get them approved and get them to the product.

Now looking at using graphene as the active material of anode. Of course, there is a higher loading of graphene in the product as well. You're going to go through a longer validation process, though we have strategies to accelerate that. You'll see it in the strategy presentation, but our graphene product offering for the active material is pretty similar to graphite. So we can pretty much fit into the spec sheet of the graphite but through a path of graphene. I mean you will see that coming out.

When you talk about graphene silicon loading, if it's low, it's easier to integrate. But when you're talking about solid state, you're not going to see anything before 2032. And that's our initial real commercialization target for 2023. We think that internally, with an analysis by 2045. We see a liquid electrolyte solid state. So that's the time horizon for us. It's pretty low. But the loading level now for liquid electrolytes is low. So, still it's a business currently on that. But there is future potential for liquid.

[MacMurray Whale, analyst]

Okay. That's great. That's helpful. Obviously, it's helpful to be able to sort of not sneak it in. But in a way that gives great results from the beginning, and yet it's not deemed as critical. And then once you get used to it, you then add the functionality. You start to put more in. So it's interesting. Well, I look forward to reading that strategic report. I think it will help investors grasp the pace of adoption.

[Operator]

And I'm showing no further questions. I would now like to hand the call back to management for closing remarks.

[Martin Gagné, executive]

I would like to thank everyone for attending this call, and we wish you a great day. You can now disconnect.

[Operator]

This concludes today's conference. You may now disconnect.