NanoXplore Inc.

Good day and thank you for standing by. Welcome to the Q4 2022 NanoExplore EARNX conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. 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.

Merci, opérateur.

Bonjour à tous et bienvenue à la conférence téléphonique du quatrième trimestre de NanoExplore. Good morning, everyone, and welcome to NanoExplore's fourth quarter conference call. Today, I'm here with Sourouche Nazafour, 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 questionnaire language in yesterday's earnings release and in our MD&E regarding the various factors, assumptions, and risks that could cause our actual results to differ. With that, let me turn it over to Solge.

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 patents, we are broadening our scope and accelerating our downstream market access. Moreover, this patent portfolio includes seven patents on graphene silicon composite anodes, which protect our graphene silicon composite anode technology. Silicon-based anodes play a crucial role in the current liquid electrolyte. but will play an even bigger role in the next generation solid-state batteries, 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 batteries. Now that we have all IEP protection that we needed, we intend to build a dedicated R&D facility for next generation of batteries, and built a silicon graphene pilot manufacturing plant with a starting capacity of 100 to 200 tons per year during 2023. Moving to management, we made some changes during the quarter. During his time at Nano Explorer, Luke played a crucial role in building the strong foundation that the company sits on today. Luke was a valuable team member and will be missed for his selflessness and keen business sense. He has stayed on until September 1st to enable a smooth transition and currently working full-time in Volta Explorer 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 Target SA, 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 NanoExport. We are very happy to have him on the team. Leading gears to our results, we are very happy with our performance as we finish the year with a total revenue of $94.3 million, beating our internal forecast of $90 million. This enables 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 upon. We have a high conviction in our graphene potential And this wonder material will no doubt power the two megatrends of the next few decades, which are the energy transition and sustainability. Nanosource is playing in three key growth vectors that will enable these megatrends. These vectors are battery materials, composite light weighting, and especially compounds. Let us start with battery market, which is the first growth vector for our graph. Lithium-ion batteries are central to the success of transportation OEMs 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. Some experts, such as Simon Moore, head of Lithium Iron Battery Data Film Benchmark Minerals, have referred to the push for regional battery production and supply chains at an arm's race. Logistic and supply costs play a key role here, as batteries are heavy, costly, and complicated to move because of varying regulations around 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 batteries are generally cheaper to manufacture 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 gigawatt 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 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 a graphene-silicon composite additives production facility. Using graphene not only as conductive additive in anode and cathode, but also as an active material of anode is the main driver for us. Graphene is known to be a material that generally doesn't lithiate as graphite, and because of higher surface area, it will show a very short life cycle in batteries. We have addressed both these issues and developed a process where we can use graphene as active material of anode to replace spherical 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 fiber 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 Tesla Model 3, the battery weight represents 25% to 30% of total vehicle weight. One of the key pain 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 graphene-enhanced sheet molding compound, SMC Composite, with two of our large commercial OEM customers, and this validates our previous acquisitions. By adding graphene to SMC, we reduce the weight by up to 25% versus other SMC composite parts, improving the surface finish as well as safety factor. We are seeing strong interest from other OEMs for graphene black SMC solutions for exterior parts of the vehicle. Moreover, battery enclosures, excluding the cells, are heavy and could weigh between 150 to 200 kgs. 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 toward 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 energy transition, and our graphene-enhanced composite solution will help lower the weight of battery enclosure and thus improve the range of EVs. The third growth vector is our graphene specialty compounds and applications. We believe that we cannot have a sustainable world 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 emits seven 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 funnel. A few segments have emerged where our product is functioning exceptionally well. One is cement, where a small loading of our graphene showed a tangible increase in strength. As we continue validation with several cement manufacturers, we believe this will 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 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 strength from 15% and up to 70%. Even though these numbers have been reported before in scientific articles by a few other graphing companies, We believe our large-volume and low-cost graphene production capabilities positions us particularly well to supply a cement market. Currently, we are working to replicate these performances in industrial cement production facilities of our partners and continuing the validation process. Another one is thermoplastic compounds, which we have been successful in a few areas, such as graphene-enhanced nylon and polypropylene applications in transportation. and graphene-enhanced polyethylene application in pipes, geomembranes, and rigid plastic packaging markets. We will continue developing these products with end-users and partner up with intermediaries such as plastic compounders and formulators to scale our production gap capabilities. Another one is polyurethane foam insulation for the construction and transportation market. As we add graphene to the mix, we are seeing a tangible improvement in insulation efficiencies of these foams. We are developing these solutions for over three years and believe this can also be a large segment of our future sales. 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 accounts. Some accounts are reaching the commercial status, and some are continuing with the pilot testing, but overall, our active model 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 tons 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 vital spread adoption of graphene in several markets. First is the availability of supplies. 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 at a 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 certification as a substance. And a new material requires to be certified in order to be produced and shipped across borders. This 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 this certification in U.S., Canada, and Europe. Third is the production validation. These include technical performance, financial validation, sustainability, and lifecycle 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. Majority of products and applications are certified through ASDM or ISO or directly by OEM. For instance, for a new additive to be used in plastic pipes, corresponding ASDM 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 besides carbon black and continue to work with related associations to modify ASTM certification. This is a cumbersome process and 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 their respective markets, which accelerate this process. Nevertheless, it has to be done, and we will continue to do so. To conclude, we are developing the graphene market and will continue collaborating with our customers and partners while acquiring key assets at reasonable cost, as demonstrated before. We would like to see more products in the market with our graphene and accordingly expect seeing revenue growth. This coincides with investing on many initiatives in our business, such as streamline 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 and to accelerate sales. 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.

Thank you, Soroush. I'm very happy to have joined the NanoExplore 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've 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 am pleased to report we finished the year on a strong note, and as Saroosh 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, beating 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, a 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 equivalent and 7.1 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.

Thank you, Pedro. I would like to end our prepared remarks with these comments on our upcoming five-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. We should be doing our Q1 call. With that, I will keep the line back to MAPA.

Operator, we cannot open the line for questions.

Certainly. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. One moment. Our first question will come from Amir Azad of Echelon Partners.

Thanks for taking my questions and congrats on the quarter. Thank you. My first one's on the Canuck acquisition. I'm actually pleasantly surprised with the performance. Correct me if I'm wrong, it seems like it's close to $7.5 million in sales. Um, 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, um, growth out of that seven and a half million?

Sure. So, uh, Kanaka historically, uh, was not doing as much. So, um, the increase that we're seeing is related to the product mix. Um, they have, um, 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've been able to absorb business in transportation, and we really think that this trend is going to continue in the next couple of quarters still.

Okay, that's good to hear. I think the funnel numbers you gave Soroush 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?

Yeah, so we are pretty reluctant these days to accept a new development partner in our 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 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 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.

Just on that last part of your answer, you said we'd see 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 sort of changes to that timing or potentially to the size of the module? Can we see it maybe two modules at like 8,000 instead of one at 4,000?

So 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.

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 tons per year, How much will that cost you? Does that sort of cover all your needs for the two gigawatt hour facility?

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's 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 half a percent to one percent of that graphene silicon additive would be enough for the current needs of Volta, inherently put you know, a total annual need of close to 100 tons per year, 100 to 200 tons 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.

Great. 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?

Yeah, 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 validating economics, second is financing, and third one is site selection. I mean, if 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 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 of a project by itself. It was more a discussion around how this act will impact the battery cost and prices going forward, right? So we are continuing the discussion with the Canadian government and as well 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, right? So we're now working a lot more on the OPEC side of the battery plant. So a long answer to a question, but we expect to, we are hoping to see, you know, updates about the project within this calendar year.

Okay, no, I appreciate all this, Keller. Congrats again. I'll pass the line. Thank you.

Thank you. One moment.

And our next question will come from Rupert Mirror of National Bank. Your line is open.

Good morning, everyone. Good morning. I'd like to just 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?

Yeah. So, 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 and step second. 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 was something that we were pretty worried in the future as we had much weaker intellectual property protection on there. The acquisition pretty much came to support the IP rate to the mechanical side of the process to produce graphene and silicon. That's where you mix graphene with silicon pretty much, okay? The patent that XG got, it is a very general patent. It's borderline a material patent than a process patent. So as a result, the scope that it covers is pretty wide. And we believe that many of the graphene-silicon mix producers for anode are going to infringe that patent. As a result, we took that patent over, and that gives us the protection going forward to have pretty much all the steps of production of graphene-silicon protected by intellectual property.

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

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

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

Yeah. So 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, an old patent of XG, which is pretty much the patent that covered 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. It's pretty much because of that other IP acquisition that we did.

And with XG Sciences, were there any key employees that come along with that acquisition? Anything that it'll do to the cost line that Nano explore?

So when we acquired XG, it was already ceased operation. So there was no employee 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.

Great. Thanks for the comment. I'll leave it there.

Thank you.

One moment. And our next question will come from Michael Glenn of Raymond James. Your line's open.

Hello? Hello. Hi. Hi, Miguel.

Oh, okay, sorry, I missed my name. Can you, just to go back on XG, so with, 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?

Yeah, so XG invested a lot more on earlier stage R&D activities. Our focus has been more on uh later stage or big d in the r d right so so so we are you know bringing those lab equipments that has been you know they're 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 um we brought those um lab equipments uh we're bringing those lab equipments to montreal and 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 electrolytes, so it's closer to revenue. But now that we're getting enough resources, let's say, through that acquisition, we are focusing a bit more on solid estate and hopefully on sodium ion batteries. Now, these two, there are very early stages. 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 estate and afterwards on sodium ion batteries. So that's That's what we mentioned by putting that battery. It's a bit more longer term than what we normally do in nano.

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?

No, it's in a separate location.

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 Nanoexplorer going forward?

Yeah, good question. So, you know, you see some big names like Hanwha and Cabot 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 XP, 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.

Okay. So some of those partners do remain actively engaged and interested in what you're continuing to invest in? We certainly hope so. 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 when we look at your top line right now, how much of the sales mix or products will now include graphene?

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, include graphene. We have graphene, you know, accepted and now included in the resin transfer molding products. We have graphene in 100% of our Vinnipeg facility products. We have graphene in the Kanaka 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 light rating 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, it's just irrelevant at this case. We acquired these companies. They were not using graphene. The 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 integrated approach, graphene is in the majority of those products already.

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?

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 products. by the end of next year, early 2024. So that translates to full utilization of the plant by that time. 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 to the carbon black market, it's just peanuts, very small. And we should start looking at much larger volumes than a single module. OK.

Thank you for taking the questions. One moment.

And our next question will come from George Gianrichis of Canaccord Genuity. Your line is open, George.

Hi, good morning, gentlemen. Thank you for taking my question. Maybe to start 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.

That's a great question. So yes, we were We're looking at this act 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 credits, which is a part of that act. It's 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 U.S. and Mexico. So in a sense, countries that they have within their USMCA are within that credit, though when it comes to cell production, it is really dedicated to the battery facilities in U.S. And, you know, yesterday we heard from Tesla moving, you know, potentially moving equipment 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 U.S. dollars per kilowatt hour of battery produced for the first five years, and that continues through a a tax incentive afterwards. So, you know, you can say that governments of the U.S. is paying for capex of the battery facilities and also covering the borrowing cost for bridging the financing. So 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 also impacted on the price of equipment to build batteries. So this is really driving the supply chain of the United States on the battery production. So you can imagine that this type of impactful program, 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 we are 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 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 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.

Can I ask, so you said that you saw an immediate change in the price of equipment right after the announcement? Did I hear that correctly?

Yes. 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 costs we had in Volta are not valid as the cost of those equipments are going higher, which is, again, because they have to put new capacity in place for a lot of just Panasonic announced two new facilities with 50 gigawatt hour each. So you can just imagine how much more battery production equipment is needed going forward. And, you know, the demand goes up, supply is limited, the price goes up pretty fast.

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?

You mean antitrust regulatory approval? Correct. Correct. 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 transactions are already done, and the assets are already being transferred. The ownership is already transferred. So there is no risk on that side. 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?

Well, in the case of Ford, Ford looked at two suppliers for the graphene, and that was us and also XG. So we've already been a supplier. So I think a couple of main customers of XG 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 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.

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?

Yeah. So, you know, generally, we have, when we look at our composite activities, we have better productivity in our SMC product than RTM. So we have a tendency 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 certainly comes because we have partially transferred the raw material price increase to the customer. 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. You know, as more of a sell graph in enhanced product, as more of a gross margin we see in the product. I mean, I'm generalizing it, but that's normally what we see in our businesses. Thank you, gentlemen.

One moment. And our next question will come from Mick Murray, whale of Cormac Securities. Your line is open.

Hi, good morning. I'm wondering if you could talk a bit about competition. Do you see in the graphing space, you know, as this takes place, time to get adoption, do you find that the competition is getting stiffer?

Not really. I mean, the acquisition of XG, the way a market translated that, the graph being focused, let's say market, was the first signs of consolidation, right? So when you enter that stage, you have all this popcorn of the startups that already going through a consolidation. So you see lower number of competitors. But as a result of that, you're expecting to see larger size competitors 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 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, it's just nobody knows. So there's a pretty different part of the world in China that we know there's a ton of different companies that are doing a lot of different things. The 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. We will have majority of the North American market of graphene.

Okay. When you look at some of the And 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?

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'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? So that's the concept. But you're absolutely right. Certification comes either from OEMs, like all the auto applications, OEMs are certifying your product. And on generic markets like pipes and geomembranes and, you know, 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 contents in the fourth, and graphene has already been 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. So that's how it works with the OEMs. When you go to the ASTM, it's really market-specific.

Do you find that the OEMs in general are in other areas, let's say not batteries, but in their 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 state? Is that really an opportunity even in this decade, in your view? I'm curious about what you think the automakers... reception to bleeding edge technology is?

Yeah, so if you look at our battery material 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, you know, This is normally replacing carbon black, conductive carbon black, and loading levels are 1% to 2%. So this is a much shorter and 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 cathode. For instance, you have expansion of capacity in the LFPC. These things are lower, let's say, approval process. It's easier to get them approved and get them to the product. Now, looking at using graphene as 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. So we have strategies to accelerate that. You will see it in the strategy 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, 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 is 2032. And we think that internally we did an analysis. By 2045, we see as liquid electrode as solid state. So that's the time horizon for solid state. It's pretty long. um yeah but but the loading level now for liquid electrolytes is low so it's still it's it's a business currently on that but there is future potential okay that's great um that's helpful um obviously it's helpful to be able to sort of not sneak it in but in a way you get in for a relatively

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 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. It sounds like it should be, I think it'll help investors grasp the pace of adoption. Exactly.

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

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

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