NanoXplore Inc. (OTCQX:NNXPF) Q4 2022 Earnings Conference Call September 15, 2022 8:30 AM ET
Company Participants
Martin Gagne – Director of Investor Relations
Soroush Nazarpour – President & Chief Executive Officer
Pedro Azevedo – Chief Financial Officer
Conference Call Participants
Amr Ezzat – Echelon Partners
Rupert Merer – National Bank
Michael Glen – Raymond James
MacMurray Whale – Cormark Securities
Operator
Good day, and thank you for standing by. Welcome to the Q4 2022 NanoXplore Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Martin Gagne, Director of Investor Relations. Please go ahead.
Martin Gagne
[Foreign Language]. Good morning, everyone and welcome to NanoXplore’s Fourth Quarter Conference Call. Today, I’m here with Soroush Nazarpour, our President and Chief Executive Officer; 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
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 [ph].
With these patterns, we are broadening our scope and accelerating our downstream market access. Moreover, this patent portfolio includes 7 patents on graphene silicon composite anode, which protects our graphene silicon composite anode technology. Silicon-based anodes play a crucial role in the current liquid electrolytes, but will play an even bigger role in the next-generation solid-state patents, where silicon will act as active material of the anode. Graphene will act as a barrier to reduce the silicon from swelling, thus improving the cycle life of the parent.
Now that we have all IP protection that we needed, we intend to build a dedicated R&D facility for next generation of battery and build a silicon-graphene pilot manufacturing plants with starting capacity of 100 to 200 tonnes per year during 2022.
Moving to management. We made some changes during the quarter. During his time at NanoXplore Luc look played a crucial role in building strong foundation that the company sits on today. Luc was a valuable team member and will be missed for selflessness and keen business sense. He has stayed on until September 1 to enable a smooth transition and currently working full time in VoltaXplore to help steer the ship to a very promising future.
In addition, I would like to welcome Pedro to our team as our CFO. Pedro was CFO of a large division of Tarkett, a French global flooring company, for the past seven years. He brings a strong manufacturing operation and M&A experience and expertise. His great business understanding and strong interpersonal skills make him a real asset for NanoXplore. We are very happy to have him on the team.
Switching gears to our result, 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 enable 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 five-year strategy presentation.
Our focus is to grow Graphene adoption, while building a strong foundation to grow. We have a high conviction in our Graphene potential, and this wonder material will no doubt power the two mega trend of the next few decades, which are the energy transition and sustainability. NanoXplore is playing in three growth vectors that will enable these mega trends. These vectors are battery materials, composite light weighting and specialty compounds.
Let us start with battery market, which is the first growth vector for Graphene. Lithium-ion batteries are central to the success of transportation OEM electrification strategies in terms of improving the driving range and price competitiveness. Car makers 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 engine vehicles.
However, battery technology and prices are not the only factor at 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 [indiscernible] Benchmark Minerals have referred to the push for regional battery production and supply chains at [indiscernible]. Logistics and supply costs play key role here as batteries are heavy, costly and complicated to move because of varying regulations around transportation of hazardous goods.
Car makers are organizing supply chains around local lithium-ion battery manufacturing in all regions where it is feasible in part to keep logistic costs to minimal. Although batteries 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 gigawatt 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 non-existent.
As will be shown in our upcoming five-year strategy presentation, we’re addressing this by planned capacity expansion for our Graphene and anode material production as well as by setting up Graphene second composite additives production facility. Using Graphene not only as conductive additive in anode and cathode, but also active material of anode is the main driver for us. Graphene is known to be a material that generally doesn’t litigate as graphite and because of higher surface area, it will show a very short life cycling balance. We have addressed both these issues, and develop a process where we can use Graphene as active material of anode to replace set of 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 five-year strategy presentation.
The second growth vector is graphing 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 Tesla Model 3, the battery which represents 25% to 30% of total vehicle weight.
One of the key points for consumers when they buy an electric vehicle is the vehicle range. Thus reducing the weight is paramount for OEMs as it will improve the battery performance. We have launched our graphing enhanced sheet molding compound SMC composite with two of our large commercial OEM customers, and this validates our previous acquisition.
By adding graphing 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 GrapheneBlack SMC 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 the 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, and we are well positioned here as well.
Therefore, light-weighting will be a key contributor in the net transition and our Graphene enhanced composite solution to help lower the weight of battery enclosure and thus improve the range of EV.
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 sustained. Our flagship product, GrapheneBlack, is a green material produced through a water base exfoliation process and its seven time 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 funnel.
A few segments have emerged, where our product is functioning exceptionally well. One in cement, where small loading of our Graphene showed a tangible increase in strength. As we continue validation with several cement manufacturers, we believe this would be a large segment of Graphene market in the next five years.
To accelerate this, we did set up a small cement lab within our R&D space in Montreal. This 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 improvement in the 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 cement market.
Currently, we are working to replicate this performance in industrial, cement production facilities of our partners and continuing the validation process.
Another one is thermoplastic compact, which we have been successful in a few areas as graphene-enhanced nylon and polypropylene applications in transportation and graphene-enhanced polyethylene application pipes geomembrane and rigid plastic packaging market. We will continue developing these products with end users and partner up with intermediaries, such as plastic compounded and formulators to scale our production and capabilities.
Another one is polyethylene form in relation for the construction and transportation market. As we add graphene to the mix, we are seeing a tangible improvement in the lesion efficiencies of these ops. We are developing these solutions for over three years and believe this can also be a large segment of our future steps. We’re advancing with several large chemical companies and expect to see revenue from these products next year.
Turning to our funnel. Our active funnels are 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 with patches and some are continuing with the pilot testing, but overall, our active funnels are 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 mind. Consequently, patients import. This is a larger market with more than one million ton 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 graphene cell cycle is long and complex. Several milestones have to be reached in order to see a wide spread 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 at the cost that is acceptable. We have already proved that with our 4,000 metric ton per year graphene production facility in Montreal, which accounts for around 40% of global capacity in production of graphene.
Second is graphene’s certification as a substance. Any new material requires to be certified in order to be produced and shipped across borders. It’s jurisdiction has its own requirement, 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 substance. We have already achieved the certification in US, Canada and Europe.
Third 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. OMEs, molders and formulators are all involved in these steps, making a long process and highly unpredictable. We have been successful in a few applications and continue to with many more. This is ourselves funnel, that we talked about earlier.
Fourth and last is product level certification. Majority 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 continuing to work with related associations promoted by ASTM certification. The cumbersome process requires many players in the supply chain of each market to agree with adding in new materials. In some cases, our customers are driving these modifications in the respective markets, which accelerate this process. Nevertheless, it has to be done and we’ll 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 a Graphene and accordingly expect seeing revenue growth. This coincides with investing on many — in our business, which has 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 add-on material production and to accelerate itself. All-in-all, we’ll 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
Thank you, Soroush. I’m very happy to have joined the NanoXplore team. I have 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 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 four quarters calculated under this methodology.
I’m pleased to report 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 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 two 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
Thank you, Pedro. I would like to end our prepared remarks with these comments. On our upcoming fiber 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 is comprehensive plan. For that reason, we’ll give out our outlook for fiscal year 2023 asset release of the plan, which would be during our Q1 call.
With that, I will keep the line back to Martin.
Martin Gagne
Thank you so much. Operator, we can now open the lines for questions.
Question-and-Answer Session
Operator
Certainly. [Operator Instructions] Our first question will come from Amr Ezzat from Echelon Partners. One moment, your line is open.
Amr Ezzat
Hi. It’s Amr from Echelon. Soroush, thanks for taking my questions and congrats on the quarter.
Soroush Nazarpour
Thank you.
Amr Ezzat
My first one is on the Canuck acquisition. I’m actually pleasantly surprised with the performance. Correct me if I’m wrong, 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 like one-off contracts that are driving that, or do we sort of build growth out of that $7.5 million?
Soroush Nazarpour
Sure. So Canuck historically was not doing as much. So the increase that we’re seeing is related to the product mix. They have — we have a group of products in transportation that generally tend to do higher gross margin versus more of a consumer product.
So including graphene enhanced products in them, we have been able to absorb business in transportation. And we really think that this trend points continue in the next couple of quarters still.
Amr Ezzat
Okay. That’s good to hear. I think the funnel numbers you gave through 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 sort of 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
Yeah. So 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. So we’ll try to actually make the funnel even more stable and hopefully is smaller as we go forward. So it’s more focused in 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 would see the details of expansion of capacity of graphene-enhanced 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
Just on that last part of your answer, you said we’ve seen the strategic plan, the capacity expansion. I think last quarter you were speaking to a second graphene production module with the target production in early 2024 are there any sort of changes to that timing or potentially to the size of the module? Can we see it maybe two modules, it’s like 8,000 instead of one at 4,000.
Soroush Nazarpour
So you’ve got to wait for the plan to come out. But yes, there is a chance that we expanded the output of the capacity to more than one module. But with the details of which will be in the strategic plan.
Amr Ezzat
Understood. Well, that’s positive to hear. Then if you would allow me one last one. On the silicon-graphene anodes material facility you spoke to, the 100 to 200 tonnes per year. How much will that cost you then like does that sort of cover all your needs for the 2 gigawatt hour facility?
Soroush Nazarpour
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 compound. There is still a little bit more CapEx will 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, we think a loading of 0.5% to 1% of that graphene silicon additive would be enough for the current needs of Volta, inherently puts a total annual need of close to 100 tonnes per year. 100 tonnes 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, and they need lower amounts, but that facility will produce enough to continue that development as well.
Amr Ezzat
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
Yes. So as you remember, we have discussed in the Battery Day that there are three criteria that have to be met for us to continue the Volta process. One is the validating economics. Second is financing and the third one is site selection. I mean if you — we really can put them into one particular condition. And that was the variation that comes to our decision based on the US Inflation Reduction Act, where US is providing special incentives to the battery makers to place the plant in the US.
It was less of a discussion of financing of a project by itself. It was more the discussion around how this Act will impact the battery cost and prices going forward, right? So we are continuing the discussion with the – with the Canadian government and as well the Quebec government to see how we can be short at going forward, our cost of production competitive to plants in the US.
It was less of a question of if we can finance it or not, right? So we’re now working a lot more on the OpEx side of the battery plant. So a long answer to your question, but we expect to — we are hoping to see updates about the projects within this calendar year.
Amr Ezzat
Okay. No, I appreciate all the color. Congrats again., I’ll pass the line.
A – Soroush Nazarpour
Thank you.
Operator
Thank you, one moment. And our next question will come from Rupert Merer of National Bank. Your line is open.
Rupert Merer
Good morning, everyone.
A – Soroush Nazarpour
Good morning.
Rupert Merer
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?
A – Soroush Nazarpour
Yes. So I mean, without disclosing exactly how we produce our silicon-graphene. I would say our process includes a mechanic on the step first and a more physical on step second, okay? So it’s a two-step process — which 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 in the future as we had a much weaker Intellectual Property protection on there.
So the acquisition pretty much came to support the IP list into mechanical side of the process to produce graphene and silicon. That’s where your mix grapheme with silicon pretty much, okay? The patents that XG got its worth– it is a very general patent, it’s borderline and material patents 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 and that gives us a protection going forward to have pretty much all the steps of production of graphene-silicon protected by Intellectual Property.
Rupert Merer
Given the potential importance of this patent, were you surprised that you were able to acquire it at the price that you did acquire that for?
A – Soroush Nazarpour
Yes. So it’s a much longer process and a much more complicated negotiation steps there. But we can say the fact that we paid a good price should not undervalue what we acquire.
Rupert Merer
Great. And with XG, you also mentioned that it could give you access to the downstream markets. Does that go beyond battery technology?
A – Soroush Nazarpour
Yes. So we — 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 for our product but there was a patent and old patent of XG, which is pretty much the patent that covered the products they were selling to for and that patent was inhibiting us from really going after it more via spread that’s what we’re doing now. So we acquired XG, that pattern 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
And with XG Sciences, were there any key employees that come along with that acquisition? Anything that it will do to the cost line that kind of explore?
A – Soroush Nazarpour
So when we acquired XG, it was already ceased operations. So, there was 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.
Rupert Merer
Great. Thanks for the color. I’ll leave it there
Soroush Nazarpour
Thanks.
Operator
And our next question will come from Michael Glen of Raymond James. Your line is open.
Michael Glen
Hello.
Soroush Nazarpour
Hi Michael.
Michael Glen
Okay. Sorry, I missed my name. Can you just — just to go back on XG. So with — maybe just spell it 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
Yes. So, XG invested a lot more on earlier-stage R&D activities. Our focus has been more on later stage or big deep in the RMB, right? So, we are bringing those lab equipments that has been — they are pretty — pretty expensive lab equipments in general, you hardly see those lab equipments even in universities. So, — which kind of makes sense why the company had suffered.
We brought those lab equipment — we’re bringing those lab equipments to Montreal and we are looking at a little bit longer term R&D activity on battery now. We initially started our development in solid state. We moved our technology to be more adaptable to liquid electrolyte, so it’s closer to revenue. But now that we’re getting enough resources, let’s say, to that acquisition, we are focusing a bit more on solid estates and hopefully, on sodium ion batteries.
Now these two — 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 state and afterwards on sodium-ion battery. So, that’s what we mentioned by putting that battery. It’s a little bit more longer term than what we normally doing now.
Michael Glen
So, that development — the program that you will be — that additional program you will co-locate that with your existing pilot here in Montreal, is that the plan?
Soroush Nazarpour
No, no, it’s in a separate location.
Michael Glen
It’s in a separate Okay. And then some of the — 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
Yes. Good question. So, you see some big names like [indiscernible] and Samsung and Dow Chemical in the list. Of course, the relationship and discussions, some were already known and some will continue. These were more of a 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. So 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
Okay. So some of those partners do remain actively engaged and interested in what you’re continuing to invest in?
Soroush Nazarpour
We certainly hope so.
Michael Glen
Okay. And then in terms of — this is a question that I receive frequently, but when we look at your top line right now and there’s legacy acquisitions made in the past. And when you bought those companies, they were not using Graphene. So how — when we look at your top line right now, how much of the sales mix or product sold now include Graphene?
Soroush Nazarpour
I can tell you, I mean, market likes to separate the Graphene and legacy for us. It’s very integrated. Many of our — 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 canals already. So listen, the reality is 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 these acquisitions that we did. And that’s a good growth avenue for us in the next five years, which you see in the plan.
I would say separating it in a way of legacy business and Graphene business, and it’s just irrelevant at this case. We acquired these companies that were not using Graphene. Majority of them are using Graphene in the majority of the 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. So as an integrative approach, Graphene is in majority of those products already.
Michael Glen
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
Yeah. 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 that time, right? So — but we are not going to define it quarter by quarterly. What we see is 4,000 tons even though it looks big for the Graphene market, but comparing to what we’re replacing the Carbon Black market is just peanut very small, and we should start looking at much larger volumes than a single module.
Michael Glen
Okay. Thank you for taking the questions.
Operator
One moment. And our next question will come from George G. Enriquez [ph] of Canaccord Genuity. Your line is open, George.
Unidentified Analyst
Hi. Good morning, gentlemen. Thank you for taking my question. Maybe to start —
Soroush Nazarpour
Good morning.
Unidentified Analyst
— very broad — good morning. 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
Yes, great question. So, yes, we’re looking at this act, I mean, for a couple of months before it even gets approved, and we had ideas about this coming — what we know today is, the act is advanced manufacturing credit, which is a part of that act, is covering pretty much all the supply chain of the EVs.
We break it to three parts, the critical material supply, cell production and EV production. So in these three parts there are incentives for the supply chain. Two of them, which is critical materials and EVs.
Somehow Canada is also included with the US and Mexico. So in a sense, countries that they have within the USMCA are within that credit. So when it comes to cell production, it is really dedicated to the battery facilities in the US.
And yesterday, we heard from Tesla moving — potentially moving equipments from Germany to US to start producing and benefiting from the act. It’s very hefty in terms of payments. The government is covering US$35 per kilowatt hour of battery produced for the first five years, and that continues through a tax incentive afterwards.
So you can say that government of the US is paying for CapEx of the battery facilities and also covering the borrowing cost for bridging the financing. So it’s pretty strong program. Obviously, when it got approved and absorbed a lot of activities and new facilities announcements in the US, it also impacted on the price of equipment to build the batteries.
So this is like really driving the supply chain of United States on the battery production. So you can imagine that these type of impactful programs, it impacts the capital expenditure first, but also impacts the cost. So, for us, we were already in a position that we’ve received interest from the government, Quebec and Federal to build the plant in Canada.
Now what you’re looking for is, how the cost of production of battery will evolve in the next couple of years because of this incentive and continuing in Canada, which is exactly our desire, is going to be competitive with the United States counterparts or not.
So, a 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 announcement, we think that the total announcement of the Gigafactory is 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 most likely coming down, because of this.
Unidentified Analyst
Thank you. Can I ask that – so you said that you saw an immediate change in the price of equipment right after the announcement, is that – did I hear that correctly?
Soroush Nazarpour
Yeah. So, the equipment supplier quickly see a surge of demand for the equipment, and they pretty much jacked up the prices overnight. So, many of the budgetary quotes we had in Volta are not valid as the cost of those equipments are going higher, which is, again, is because they have to put new capacity in place for a lot of – just Panasonic, announced two new facility with 50 gigawatt hour each. So, 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.
Unidentified Analyst
Interesting. Thank you for that. 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
You mean on the trust regulatory approval or…
Unidentified Analyst
Correct. Correct.
Soroush Nazarpour
Yeah. No, I mean, the transaction is already done. So 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. So transaction is already done, and the assets are already being transferred. The ownership is already been transferred. So there is no risk on that side.
Unidentified 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
Well, in the case of Ford, look Ford look at two suppliers for the Graphene and that was us and also XG. So it’s already been – is already – we’ve already been a supplier. So, I think a couple of main customers of XG. We won’t continue their product, because either the volumes are too low, or it’s outside of our target market. But some of those ones, they can be continued really with our GrapheneBlack product. Of course, when you change the Graphene from one to the other, there is set in period of validation needed. But in general, XG sales were shy of €2 million. So it was pretty low anyway.
Unidentified Analyst
Maybe you 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 kind of 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
Yeah. So generally, we have – when we look at the composite activities, we have better productivity in our SMC products than our team. So we have attempted to have a better gross margin there as well those products include Graphene in them. So they show better gross margin. That’s one side of the story. Direct Graphene sales, we put all those Graphene and Graphene enhanced composite products within the product mix. But when we talk about price increase, it definitely comes because we have partially transferred the raw material price increase to the customers. So that brought the price increase as well that we mentioned there.
So a mixture of increasing the selling price, because of raw material price increase and also the type of product that we’re selling. As more of the sell Graphene enhanced product as more of gross margin we see in the product, that — I mean that’s — I’m generalizing it, but that’s normally that’s what we see in our business.
Unidentified Analyst
Thank you gentlemen.
Operator
One moment. And our next question will come from MacMurray Whale of Cormark Securities.
MacMurray Whale
Hi, good morning. I’m wondering, Soroush if you could talk a bit about competition. Do you see in the Graphene space as this takes time to get adoption? Do you find that the competition is getting stiffer?
Soroush Nazarpour
Not really, I mean, the acquisition of XG, the way market translated that the Graphene being focused, let’s say, market was the first consolidation, right? So when you enter that stage, you have all this top corner of the 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 science competitive to us.
Right now, this trend just started. So we don’t yet see appearance of a large competitor for us, XG was a very important competitor to us. They were doing business in North America, very close to us. So we pretty much at this stage, have a pretty grasp as 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 is just nobody knows.
So there is a pretty different part of the world in China that we know there’s a ton of different companies. They’re doing a lot of different things. Their information is really limited and the claims are very strange all the time. So we just put the China aside, we don’t see yet consolidation happening in Europe, but we expect this to happen, and in North America, I think we already dominated the Graphene market in North America have — we will have the majority of the North American market.
MacMurray Whale
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 the real — is it really product certification, which is all led by the customer anyway? Is that a bigger barrier than say standards?
Pedro Azevedo
Yeah, you’re absolutely right. For battery materials, especially new ones to get into the battery market certification of the product is important and normally OEM that pretty much the business case behind Volta for Nano start with. So we wanted to use Volta as the first customer of our binary 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 battery maker and the product is already successful in the market, you tend to get past the stage of product certification faster, right?
So that’s the concept of — but you’re absolutely right, certification comes either from OEMs, like all the auto applications, OEMs are certifying your products. And on generics markets like pipes, geo-membranes and you name it, those are normally covered by ASTM and ISO — I mean, in the US 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 contents in the port and graphene has already been – our product has already been certified with port. So that opens up the applications for us in different parts of that company, and we can bid for different programs. So that’s how it works with the OEMs. When you go to the ASTM really market-specific.
MacMurray Whale
So do you find — do you find that the OEMs in general are in other areas, let’s say, on 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, do you — like what’s your view on adoption of silicon-enhanced anodes and solid state. Like is that really an opportunity in — even in this decade. In your view, like I’m curious about what you think the automakers reception to leading-edge technology is?
Pedro Azevedo
Yes. So look at our battery materials offering, it’s going to be pretty much three products. One would be conductive additive, right? We can add that to the cathode side and also the anode side. This product – this is normally replacing carbon black, conductive carbon black and loading levels are 1% to 2%. So this is a much short-term easier path to the market, right?
For instance, the killer application for carbon nanotube was – is the conductive additive to the cathode and we see the same type of performance, if not better, by adding our product to the cathode, for instance, you have expansion of capacity in the LSP. These things are lower, let’s say, approval process. It’s likely easier to get them approved and get them to the product.
Now looking at using graphene as active material of anodes, 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 by your stake in the strategic presentation, but our graphene product offering for the active material is pretty similar to spherical graphite. So we can pretty much fit into the spec sheet of the spherical graphite, but through a path of graphene.
Now 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 solid state 2032. And we think that internally with the analysis by 2045, we see as liquid electrode solid state. So that’s the time horizon for us is pretty long. But the loading level now for liquid electrolytes is low. So still it’s a business currently on that, but there is future potential on silicone.
MacMurray Whale
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 you advent [ph] in for a relatively for — in a way that gives great results from the beginning, and yet it’s not sort of deemed as critical. And then you can kind of once they get used to it, you then add the functionality you start to put on so it’s interesting. Well, I look forward to leading that strategic report, it sounds like it should be — I think it will help investors grasp the case adoption for that.
End of Q&A
Operator
And I’m showing no further questions. I would now like to hand the call back to management for closing remarks.
Soroush Nazarpour
[Foreign Language]
I would like to thank everyone for attending this call, and we wish you a great day. You can now disconnect. Thank you.
Pedro Azevedo
Thank you.
Operator
This concludes today’s conference. You may now disconnect.
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