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Edited Transcript of QS.N earnings conference call or presentation 16-Feb-21 10:00pm GMT

·44 min read

Q4 2020 Quantumscape Corp Earnings Call Feb 17, 2021 (Thomson StreetEvents) -- Edited Transcript of Quantumscape Corp earnings conference call or presentation Tuesday, February 16, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jagdeep Singh QuantumScape Corporation - Co-Founder, CEO & Chairman * John Saager * Kevin Hettrich QuantumScape Corporation - CFO ================================================================================ Conference Call Participants ================================================================================ * Adam Michael Jonas Morgan Stanley, Research Division - MD * Benjamin Joseph Kallo Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Joseph Amil Osha JMP Securities LLC - MD & Equity Research Analyst * Mark Trevor Delaney Goldman Sachs Group, Inc., Research Division - Equity Analyst * Rod Avraham Lache Wolfe Research, LLC - MD & Senior Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to QuantumScape's Fourth Quarter 2020 Earnings Conference Call. My name is Cheryl, and I'll be your conference operator today. (Operator Instructions) John Saager, QuantumScape's Head of Investor Relations, you may begin your conference. -------------------------------------------------------------------------------- John Saager, [2] -------------------------------------------------------------------------------- Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape's Fourth Quarter 2020 Earnings Conference Call. To supplement today's discussion, please go to our IR website at ir.quantumscape.com, to view our shareholder letter. Before we begin, I want to call your attention to our safe harbor provision for forward-looking statements that is posted on our website and as part of our quarterly update. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statement for the reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be QuantumScape's Co-Founder, CEO and Chairman, Jagdeep Singh; and our CFO, Kevin Hettrich. Jagdeep will provide a strategic update on the business, and then Kevin will cover the financial results and our outlook in more detail. With that, I'd like to turn the call over to Jagdeep Singh. -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [3] -------------------------------------------------------------------------------- Thanks, John. Welcome to our first earnings call as a public company. Earlier today, we published a letter to our shareholders, summarizing the major developments from the last quarter and fiscal year. If you haven't already read it, we encourage you to take a look as our shareholder letter will be the primary way we report our progress to you. In addition to the SEC website, you can also find it on our company Investor Relations website, ir.quantumscape.com. I won't repeat all of the contents of the letter here, but I would like to call your attention to a couple of key highlights. First, for those that are new to the QuantumScape story, some brief background. We were founded in 2010 out of Stanford, with a mission to revolutionize energy storage and enable a sustainable future. The first application we focused on is the transformation of the automotive powertrain to an electrified version, which we believe represents both a very important part of the solution to the emissions problem as well as the opportunity to create tremendous value over the coming decades. Over time, we expect to push into other markets, including stationary stores for the power grid and consumer electronics. We are a pioneer in the development of a new type of battery, the solid-state lithium metal battery. Our technology replaces the polymer separator used in conventional batteries with a solid-state ceramic separator, enabling us to replace the carbon or silicon anode used in these conventional cells with an anode of pure metallic lithium, which in turn allows us to make batteries with higher energy density, greater driving range on a single charge, faster charge times, and improved safety while offering long cycle life. We believe these are some of the fundamental issues holding back widespread adoption of battery electric vehicles. The beauty of our approach is we deliver these benefits not by increasing the complexity of the battery but by simplifying it, eliminating the anode layer of conventional cells. As a result, we believe the cost of these batteries at scale can actually be less than conventional batteries at the same scale. Last December, at our Battery Showcase event, we unveiled for the first time the performance data of our single layer cells, making clear the benefits of this lithium metal approach versus the traditional lithium-ion approach. In particular, we showed data showing the cells were capable of achieving long cycle life, now at over 1,000 cycles to around 90% of the initial capacity, while operating at near room temperatures of 30 degrees Celsius and high current densities or rates of power of 1C. In addition, we shared data showing these cells were capable of fast charge rates of 15 minutes to 80% state of charge, excellent performance relative to conventional cells on the most demanding drive cycles, such as those found on racetracks; and operation at low temperatures, including cycling data at negative 10-degree Celsius. We believe this data marks a new high watermark for the solid-state battery industry and are unaware of any alternative solid-state approach with better performance results. Having demonstrated this level of performance on our single layer cells, our goal for the coming year is to stack these layers up and make multi-layer cells, forming the basis for our commercial target cells. We are therefore very pleased to report for the first time that we have assembled 4 layer cells in the 30x30mm form factor, and that these cells have reached close to 800 cycles to over 90% capacity retention at both 1C and C/3 rates at 30 degree Celsius, substantially similar to the cycling performance we showed in our single layer cells, and demonstrating it is possible to stack our single their cells without adversely impacting cycle life and capacity retention of the cells. We used 30x30mm cells made from separators cut from our standard target commercial area separators because it allowed us to effectively quadruple our current output as we work to scale up our engineering line capacity. While there is still a lot of work to be done, and we could encounter new challenges as we increase our layer count, this is an incredibly important result, and we are excited to have this so early in the year. We now need to make these multi-layer cells using our commercial area, 70x85mm layers, increase the number of layers, aiming first for 4 layers and subsequently, for 8 to 10 layers by yearend, optimize the manufacturing processes and address any new challenges we find. We believe that if we achieve these milestones, we will be on track to achieve our goal of delivering prototype battery cells to our customers in 2022. The other thing I'd like to draw your attention to is that based on this recent progress and to help with further scale up, we have decided to build our own pre-pilot line facility in San Jose, which we call QS-0. QS-0 is intended to have a continuous flow, high automation line, capable of building over 100,000 engineering cell samples per year, and we expect to be producing cells on this line by 2023. QS-0 will help provide the additional capacity we need for our development work and will enable us to accelerate work on the next-generation of manufacturing tools. It will also provide capacity to make enough batteries for hundreds of long-range battery electric test vehicles per year. This will allow us to provide early sales to VW, as well as other automotive partners, explore nonautomotive applications and help derisk subsequent commercial scale up. With that, I'll hand it over to our CFO, Kevin Hettrich, to say a few words about our financial performance and then open it up to Q&A. Kevin? -------------------------------------------------------------------------------- Kevin Hettrich, QuantumScape Corporation - CFO [4] -------------------------------------------------------------------------------- Thanks, Jagdeep. Before I get perspective on our financial outlook for 2021, I'd like to first give a little color on our fourth quarter and full year 2020 results. In the fourth quarter, our operating expenses were $30 million. Excluding stock-based compensation, operating expenses were $22 million. In accordance with U.S. GAAP, we were required to take a noncash expense of $665 million relating to Warrants and Series F preferred stock issued prior to the business combination, bringing our GAAP net loss in the fourth quarter to $695 million. These preferred warrants and series F preferred stock, originally classified as liabilities in accordance with U.S. GAAP, were subject to noncash fair value measurement at issuance and in each reporting period. The final remeasurements were done at the close of the business combination. As a result, there will be no further remeasurements related to these. On a full year basis, our operating expenses were $81 million, or $64 million excluding stock-based compensation. Our GAAP net loss for fiscal year 2020 was $1.1 billion. Of this amount, $1 billion represents the noncash fair value adjustment of the preferred stock and warrants in accordance with U.S. GAAP previously referenced. With respect to share count, I'll be providing numbers rounded to the nearest 0.1 million shares. We ended 2020 with approximately 364.0 million shares of common stock outstanding. As of December 31, 2020, the company had a total of approximately 466.6 million issued and issuable shares, including those issuable upon the exercise of warrants, shares issuable upon Volkswagen's second tranche investment and shares issuable to employees and consultants upon the exercise of outstanding options or vesting of RSUs. Note that all the aforementioned shares, warrants, options and RSUs have been registered on the company's S-4, S-1 and S-8 filings. With respect to cash, we used $37 million of free cash flow in the fourth quarter and $85 million for the full year 2020. We anticipate free cash flow burn to be in the range of $230 million to $290 million for 2021, of which approximately 40% to 50% is CapEx, including investments in QS-0. These investments will support our multilayer work, advanced production process maturity, notably to make our solid-state separator cells and for cell assembly, and support customer engagement. We expect to use less than $60 million of net cash in 2021, assuming receipt of proceeds from the Volkswagen financing and assuming exercise of public warrants. This would allow us to enter 2022 with a liquidity position of over $900 million, sufficient funding, we believe, to fund us through production. Of course, the pace with which we are able to spend will depend on several factors, including the ability to ramp headcount and the maturity of our production processes, including the level of its automation. With nearly $1 billion on the books as of Q4 2020, the strength of our balance sheet, we believe, will give us the flexibility we need to execute on our plan through commercialization. In summary, we're excited with where we are and look forward to the challenge ahead. We'd like to thank our investors for their support and belief in our mission to help usher in the battery and electric vehicle revolution. With that, I'll pass it back over to John. John? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- John Saager, [1] -------------------------------------------------------------------------------- Thanks, Kevin. As a matter of practice, going forward, we'll begin the Q&A portion by asking our management team a few of the most pertinent questions on the minds of investors. For future reference, investors can submit questions through our Investor Relations inbox, by e-mailing ir@quantumscape.com. This quarter's most frequently asked questions are as follows: competitor progress and announcements. It seems like others are going to get to market before QuantumScape and have already achieved multilayering. Can you talk about your progress as it relates to that of others, like NEO, Toyota and SolidPower? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [2] -------------------------------------------------------------------------------- Sure. The key point to note here is that it doesn't help to have a multilayer cell that uses a single layer building block that doesn't work. It will be the equivalent of trying to put up a multistory building when you haven't been able to make a single-story building without collapsing on itself. So we haven't seen any data from any other competitor that has shown a solid-state separator capable of delivering long cycle life and high current densities without requiring elevated temperatures. As a result, the players you just mentioned fall into 1 of 2 categories: Those that have reverted back to carbon-based anodes, which of course, results in a loss of many of the key benefits of the solid-state metal architecture, including energy density, fast charge and cost; and those that use lithium metal, but can only work under compromised test conditions that make those cells not commercially viable. We believe we're the only player to have shown a solid lithium metal, single layer building block, capable of meeting the key requirements of long-cycle life, high current density and unelevated temperatures. So for those who are interested in learning more, we've actually published a survey of the solid-state battery landscape and you can find it on our website at ir.quantumscape.com. -------------------------------------------------------------------------------- John Saager, [3] -------------------------------------------------------------------------------- Okay, great. Next, can you explain the different time lines between 1C and C/3 charging? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [4] -------------------------------------------------------------------------------- Sure. This is terminology used by the battery industry, and it's simply a way to refer to the rate of charge and discharge. The letter C in that description refers to 1 charge or discharge, and the number refers to how many such charges or discharges can be performed in 1 hour. So 1C means 1 charge or discharge per hour. C/3 means 1/3 of the charge or discharge in 1 hour, or 1 full charge or discharge in 3 hours. Note that higher C rates are more stressful on the battery, adversely impacting cycle life. The lithium-ion battery cycle life testing is often quoted at C/3 rates. Because the QuantumScape technology is robust under high-power conditions, we're actually able to run our cycle life tests at 1C rates, which allows for faster data collection and shorter development cycles. And finally, I'll point out that with conventional batteries, they can either be designed to be energy cells with high energy but low power, or power cells, which have high-power but low energy. One of the unique things about the QuantumScape technology is it's an energy cell with a target of 1001 hours per liter, higher than the cells used in today's best-selling EVs, for example, which are around 700 or so watt hours per liter. But can still be charged at high rates, as shown by our 4C 15-minute charge data. -------------------------------------------------------------------------------- John Saager, [5] -------------------------------------------------------------------------------- Okay, great. Our next question is, how will future improvements in lithium-ion chemistry affect your batteries? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [6] -------------------------------------------------------------------------------- Sure. So most of the improvements in the world of lithium-ion stem either from better cathodes or better anodes. On the cathode side, we're completely agnostic. So we're able to take advantage of any improvements on cathode technology, including material level improvement, such as higher nickel content, as well as manufacturing level improvements such as dry electrode processing. Now because these improvements are being driven either by material suppliers who sell to us, or in some cases, automotive OEMs to whom we sell to, we believe we'll have access to both of these sources to either those as a competitor. On the anode side, the improvements are related to adding a certain amount of silicon to the carbon anode, since silicon can hold more lithium than carbon. However, silicon expands and contracts so much during cycling that it adversely impacts the cycle life of these cells. So the amount of silicon used in these cells is limited to a fraction of the anode. As a result, this approach only provides a small benefit in energy density. By contrast, our lithium metal approach eliminates 100% of the carbon or silicon in the anode, resulting in a significant increase in energy density. Thus, we see our cell's lithium metal approach as being able to deliver greater density than conventional lithium-ion even into the future. -------------------------------------------------------------------------------- John Saager, [7] -------------------------------------------------------------------------------- Okay. And our final question, what makes you feel like you'll have a sustainable cost advantage over the rest of the industry? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [8] -------------------------------------------------------------------------------- So in our architecture, we eliminate the traditional carbon or silicon anode entirely, which means we get rid of the anode materials, the anode electrode manufacturing line and the anode formation process, which is a multi-week long process in which a chemical side reaction is allowed to occur between the carbon particle and the liquid electrolyte. As a result, given we believe our separator will be in the same order of magnitude and cost as conventional separators, we expect that the quantitative approach, what should be lower cost than conventional ion cells at any given manufacturing scale. -------------------------------------------------------------------------------- John Saager, [9] -------------------------------------------------------------------------------- All right. Thank you, Jagdeep. We're now ready to begin the Q&A portion of today's call. Operator, please open the lines for questions. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Mark Delaney from Goldman Sachs. Please go ahead. -------------------------------------------------------------------------------- Mark Trevor Delaney, Goldman Sachs Group, Inc., Research Division - Equity Analyst [11] -------------------------------------------------------------------------------- Very happy to have the company having its first earnings call. I wanted to ask about the pre-pilot facility that you announced today and the additional cells it's going to give the company to work with. Do you think that changes your outlook that you articulated in the investor deck in terms of what kind of revenue the company can be generating, either in terms of, perhaps generating revenue somewhat sooner than the current 2024 projection, or potentially higher in magnitude compared to what you previously outlined? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [12] -------------------------------------------------------------------------------- Yes, hey Mark, this is Jagdeep. Thanks for the question. So the QS-0 is really designed to produce cells for test vehicles. So we don't expect it's going to have a material impact on revenues directly, in the sense that it's going to make cells that we will provide to our automotive OEMs to make test cars. But it does have an indirect impact in the sense that it increases the probability that we can have a successful rollout of QS-1 and subsequent manufacturing builds. So that's the way I would think about what QS-0 is designed to do. -------------------------------------------------------------------------------- Mark Trevor Delaney, Goldman Sachs Group, Inc., Research Division - Equity Analyst [13] -------------------------------------------------------------------------------- That's helpful. And then in terms of the run rate on operating expenses that the company guided to for this year. So think 50% to 60% of the cash outlays that you put in your shareholder letter. I think you implied operating expenses in 2021 are a little bit above what is implied in the last investor presentation for 2022 operating expenses. So it seems like perhaps the company is taking up its planned investment levels. And I assume that correlating with this QS-0 and some of the ability that the company has to do a bit more. But I am hoping to better understand to what extent you are, in fact, taking up your operating expenses compared to the prior plan. -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [14] -------------------------------------------------------------------------------- Kevin, do you want to take that one? -------------------------------------------------------------------------------- Kevin Hettrich, QuantumScape Corporation - CFO [15] -------------------------------------------------------------------------------- Sure. Mark, as you would have seen from our current run rate, we're spending -- we spent $27.2 million in operating activities in Q4 and $10.2 million in CapEx. And as you correctly noted, the guidance was $230 million to $290 million in '21 with about 40% to 50% being allocated towards QS-0. QS-0 is incremental to the plan, so there will be the OpEx portion. You would expect it to be a little higher, leaving '22 and beyond. We don't have specific guidance on that number in this call. -------------------------------------------------------------------------------- Mark Trevor Delaney, Goldman Sachs Group, Inc., Research Division - Equity Analyst [16] -------------------------------------------------------------------------------- Understood. And just lastly, in terms of some of the operational milestones, thank you for the update on the multilayer and that's good to learn more about. The other area that was discussed by the company was in terms of getting the yields up on the separator manufacturing. I don't know if there's anything on that front that you're able to share with us today. -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [17] -------------------------------------------------------------------------------- Yes. This is Jagdeep. Yes, there's nothing we're sharing today on that. But I think the important milestone really was demonstrating that when you take single layer cells and make multilayer stacks out of them, in this case 4 layer stacks, that the capacity retention and the cycle life behavior doesn't change materially. So that's really what we're excited about. And as I pointed out in the opening remarks, obviously, there's more work to be done there to scale up production and to have the layers be in the actual production size of 70x85 and to deal with any other unforeseen issues that might arise as we complete that process. But the core result that the single layers can be in fact stacked into multilayer cells, with data that looks substantially very similar to what the data was that we showed in singular cells, that's very exciting to us. And to have that this order in the year, it just means that we have the rest of the year to accomplish the rest of those tasks that I mentioned in terms of scale up. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- And our next question comes from Adam Jonas from Morgan Stanley. -------------------------------------------------------------------------------- Adam Michael Jonas, Morgan Stanley, Research Division - MD [19] -------------------------------------------------------------------------------- First, great disclosure. A couple of questions. On QS-0, I think it gives you, to your point, a chance to test prototypes with other, say, non-Volkswagen customers and potential customers as well. I'm curious if today you're able to update us on the status of any discussions with non-VW customers. As I imagine your IPO or the listing of the company itself and all the attention around it can create a lot of interesting commercial benefits. I'm curious if that you've seen an uptick in those discussions or anything you care to update us at this time? And then I have a couple of follow-ups. -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [20] -------------------------------------------------------------------------------- Yes Adam, thanks for the question. Yes. So as you correctly guessed, I mean the somewhat higher profile that we have now that we're public, has clearly resulted in a meaningful number of inbounds that we're working through. We have said before that we've actually had ourselves tested by multiple automotive OEMs. So VW, obviously is the only one that we've announced. But I think that, as you know, the VW deal, as great as VW has been as a partner, that deal is nonexclusive. So we are free and we fully intend to work with other OEMs in the fullness of time. We're not announcing anything on that front today, obviously. But we fully expect to work with multiple OEMs over time. And beyond automotive OEMs, we're also seeing interest from other sectors. Some of the ones we mentioned earlier, including the stationary storage for the grid as well as consumer electronics. And we're -- right now, we are constrained by our ability to just produce enough cells to provide customers with cells to test. But as we bring QS-0 online, we are able to produce more cells, that's one of the big benefits of having that production capacity as we will, in fact, be able to make this technology available through a broader set of customers that have expressed interest. -------------------------------------------------------------------------------- Adam Michael Jonas, Morgan Stanley, Research Division - MD [21] -------------------------------------------------------------------------------- Next question's on the factory location of QS-1 and the expansion in Europe. I think most people on this call would expect that it might be in Germany. I don't know what -- I don't know what we should -- how you're thinking about that, particularly as you're seeing other battery capacity investments being closer to renewable sources of energy. You're seeing Norway get a lot of it. So I'm curious if -- again, I'm not trying to ask you to break new news that you didn't put in your letter, but how you're thinking about proximity to Volkswagen versus renewable sourced, at the source, in manufacturing for what is a very energy-intensive process? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [22] -------------------------------------------------------------------------------- Yes. It's a great question. And I think what I can say is, those are exactly the kind of, I think, the kind of issues that we need to balance as we make those final sizing decisions. So on one hand, the trend in the industry is to locate battery manufacturing close to where the vehicle manufacturing is, we did that with the Tesla Gigafactory. On the other hand, you also need to balance the supply chain aspects, of the (inaudible) because you manage this power. It also includes other supply that goes into the battery, increased labor. So it's a multi-dimensional kind of a problem. And I think the main takeaway is it -- the facility is likely to be close to where the vehicles are manufactured. But the question of how close is going to be a function of how those other dynamics come into play. -------------------------------------------------------------------------------- Adam Michael Jonas, Morgan Stanley, Research Division - MD [23] -------------------------------------------------------------------------------- Okay. And just a final one for me, Jagdeep. You mentioned other markets. When I hear you talk about the energy density, both gravimetrically and volumetrically, of course, there are direct implications to electric aviation in the EV toll market. And some of the scenarios we're running, at least the size of those markets could be, in some cases, very, very large, in some cases, maybe even larger than the automotive market. Curious what you think about that market potential of EV toll or urban air mobility. Is it something that you, at a high level, are exploring, even though you don't mention it and call it out specifically in your prepared remarks? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [24] -------------------------------------------------------------------------------- Yes. That too is a great question. EV toll is definitely a very interesting, new emerging area. And we are, in fact, in discussions with players in that sector. It's a little too early for us to be able to predict just how big that market will be and when it starts taking off. But -- but as you correctly surmised, that market is extremely sensitive to the gravimetric anti-density in particular, because that obviously impacts the whole -- the whole application pretty significantly. And so the energy density benefits that we're offering make it a really compelling fit for that application. So I think what it comes down to, in the end, is we have, in the near term, at least in very near term, we're going to be somewhat capacity constrained. And what that gives us the luxury of is really being able to pick those markets that have the most compelling fit in terms of the overall application, the economics for us, for our customers and so on. But as we make progress on sort of narrowing down some of those near-term expansion markets, we'll be sure to communicate them as well. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Our next question comes from Rod Lache from Wolfe Research. -------------------------------------------------------------------------------- Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [26] -------------------------------------------------------------------------------- Hi, everybody. Wanted to ask just on the -- about the gating factors in testing and moving to 8 to 10 layers. Maybe you could just give us a little bit of color on what the incremental challenges are that you'd need to overcome. I'm assuming that there's -- it's the volumetric changes that those cells encounter when they're being plated with lithium. And also how many layers do you anticipate in the final commercial form factor? And what are the biggest development challenges do you need to overcome in order to achieve that? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [27] -------------------------------------------------------------------------------- Yes. Hey Rob, it's Jagdeep. So the number of layers is a little bit of a variable commodity. It depends on which customer and which pack design and which modules are you talking about. So there's no one number I can give you there. I think if you say there's going to be a few dozen layers in virtually every flavor of cell that we make for different OEMs, then you'll be in the right ballpark. And it doesn't kind of capture it. It's going to be more than a dozen and less than -- less than a few hundred, right, somewhere in that range. But a few dozen is the right range. As far as the main challenges to get there, to be quite kind, the major issue lies -- the major need that we have in the very immediate term is just to make more of these materials. So we can make more cells. Multilayer, what isn't generally appreciated in multilayer is it -- if you're making multilayer cells, you need a lot more layers. So a 4-layer cell, for example, needs a quadrupling of your manufacturing capacity. A 10-layer cell means an order of magnitude more capacity. We sized our engineering lines to be appropriate for the development work we're doing on single layer cells. Once we had the single layer data that we shared with the world in December, we started ramping up production tools and equipment to be able to produce more cells. But unfortunately, a lot of those tools, we -- the good news is we get -- we can acquire those tools from existing suppliers. So we don't need to make those tools ourselves. But on the downside, those tools have lead times associated with them. So we can't just turn on the spigot and make more cells overnight. So there's a lot of tools waiting on that have been ordered, that need to be delivered, turned up, configured. That's really, probably the most immediate gating item to the multilayer cells. Once we get that capacity installed, we're going to be able to produce more cells, do the appropriate engineering work to finish that development cycle. And once we get to our target of 8 to 10 layers by year-end, at that point, we will have -- as I mentioned in the prepared remarks, the building blocks to be able to then build the samples we provide to customers. -------------------------------------------------------------------------------- Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [28] -------------------------------------------------------------------------------- Okay. Great. And can you just give us an update on your latest thoughts on scaling, just assuming that everything goes well with the pilot line in 2024. Presumably, you're going to want to scale this as much as possible with the variety of cell manufacturers. So what could the economics of that look like as you want to expand beyond 2024? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [29] -------------------------------------------------------------------------------- Well, I mean, just to make sure, I ask the question, are you asking about kind of the business model, except for how we might do more production capacity? Or is that... -------------------------------------------------------------------------------- Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [30] -------------------------------------------------------------------------------- Yes. I would assume that you would want to leverage capacity that's being built by a variety of different cell manufacturers elsewhere, right? So that would involve some licensing arrangement. It would be challenging to manage that all by yourselves. -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [31] -------------------------------------------------------------------------------- Yes. So what we've said is there's sort of a handful of key fundamental ways you could do production, right? So the simplest way is to do it all yourself. That's one of the ones you mentioned, right? The next way is we have this JV-type model that we're doing with Volkswagen. In that case, we're obviously bringing the core solid-state battery expertise, and they're bringing a lot of general high volume, high-quality manufacturing background. The other models where we can actually outsource some of the components that go into our cells. So for example, the really unique part of what we're doing, of course, the solid-state separator. Some of the capital work could potentially be done by third parties. So we're obviously exploring that. The ultimate, I think, in terms of outsourcing would be if we were to just license the IP to a third-party manufacturing company. And the challenge there of course, is just IP protection, IP diffusion, right? You don't want to license IP to somebody -- unless you have super high confidence that, that IP is going to be protected. Otherwise you're just kind of diluting the fundamental -- the crown jewels of the company in some way. So I think what we're doing is try to just look at the economic trade-off and balance between those different models. For sure, we're doing the JV with VW. For sure, we're doing our own production with QS-0. And we have no particular desire to spend any of our capital or any of our team's energy or bandwidth on -- to do things that can be done better elsewhere, or they're already being done elsewhere. We want to basically do things that are not available elsewhere. So if we can buy something that has sufficient quality and reliability to meet our needs from a third party, we will absolutely want to pursue that. It's only -- if somebody doesn't make something that we need, then we want to do it ourselves. So that's a general philosophy that you can assume we will use going forward on that front. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- And our next question comes from Ben Kallo from Baird. -------------------------------------------------------------------------------- Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33] -------------------------------------------------------------------------------- Congratulations, guys, on the first conference call. Thanks for all the information. One of the things that you talked about, and we're still trying to understand the layering, and congratulations on that step. Once you have the sufficient number of layers, how difficult do you anticipate is transitioning into a pack? That's my first question. -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [34] -------------------------------------------------------------------------------- Yes. Hey Ben, how are you? Thanks for the question. So the number of layers, as I mentioned earlier, that we have in each cell is going to be really a function of what the particular packet module needs. So it will kind of be designed with the packing module in mind. And once you have that cell with the right number of layers, then the pack level design is, relatively speaking, straightforward, in the sense that the electrical behavior of these cells is similar to what is already being used. We use the same capital material that's conventionally being used. So the discharge profile electrically will be very similar. The thermal behavior of these cells, we expect will be better, because the lithium metal that makes it our anode is a much better conductor of heat than the traditional carbon-based anode is. So we can shuttle away heat much better. Also, our separator is much more tolerant to heat and stable to very, very high temperatures. The BMS interface should be very similar to conventional BMSs. So we think that integrating at the type level should be -- it requires engineering, of course, but because the cells have already been designed, we'll be -- will have been designed to the particular module and pack specs, we don't expect any fundamental challenges there. The real work is just being able to complete this multilayer development that we showed the really big data on earlier today. -------------------------------------------------------------------------------- Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [35] -------------------------------------------------------------------------------- Okay. You've mentioned consumer electronics and then stationary storage and potentially other markets. Can you talk about why -- because maybe it's counterintuitive to me, but consumer electronics, seems like it could be the easiest market to go after the less onerous requirements around the packs or the batteries themselves, but maybe that's just the Volkswagen relationship to is moving you towards the auto market first? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [36] -------------------------------------------------------------------------------- No, it's a great question. I mean, we spent many years -- we got a lot of time in the early days of the company trying to figure out which markets we should go after. Look, there's many battery companies that try to do it all. And our fundamental belief is as a start-up, we had to focus. We're trying to do too much, this results in doing nothing well. We wanted to -- we rather -- we thought we'd rather pick a smaller number of markets that really solve their problems really well. And the question, which one do we pick, if we can't do them all? And we -- based on our analysis, you're absolutely right, consumer electronics, without a doubt is a much easier market. It doesn't need the same power density, no one's going to need 4C charges, 15 minute charge for a cell phone. The operating temperature doesn't to be a negative, whatever, 10, 20, 30 degrees, pretty much going to be a positive 10 degree Celsius is a standard spec. You don't need as many layers. It's just -- these are some of the ways. Having said that, we saw that the size of the market, which is so much bigger with the automotive application. Each car, each long-range BEV for (inaudible) Tesla model, less cross vehicle, has the equivalent of 10,000 iPhones' worth of batteries, right? So that's 4 orders of magnitude bigger, which is massive, right? So if you look at Apple's volumes, I haven't checked recently, but even if Apple sold something like 200 million phones a year, that would be really the size of a small pilot line. That's not much more than our first VW Phase I pipeline we'll be producing. So it's a very small one for what we can do here. The second point we make is that in terms of impact in the application, cell phones, they'd love to get more battery. These consumer devices would love to reduce the volume taken up by the battery by say a factor of two, so they can squeeze in more functionality and more electronics into the phone. But in terms of -- but they have perfectly fine phones right now that they're selling a lot of. Whereas in the automotive space, we felt like these benefits are really disruptive enablers of a much higher level of penetration. So with a combination of the importance of our technology in the automotive sector, compared to others and the size of that sector, we locked in on that particular space, pretty early in our life cycle. And I think overall, it was a good decision because we were able to get this VW partnership, which has been phenomenal for us, as you guys already know. And I think we executed exactly on what we were hoping, which is that we picked one problem, and we think we're solving it well. And having solved it because in some ways, as you pointed out, this is the hardest of the problems, expanding to the other sectors is really, in some ways, a move downhill. So we feel like we're well positioned now that we have this sort of the high ground to go ahead and expand into other segments over time. -------------------------------------------------------------------------------- Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [37] -------------------------------------------------------------------------------- That's very helpful. And just if I could sneak in one more. Thank you for the helpful landscape paper here. I was wondering how difficult or how you guys get the information from your competitors? Are you able to actually get cells and test them? And then vice versa, are people out there able to get your cells and test them as well? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [38] -------------------------------------------------------------------------------- Yes. So absolutely, great questions, all. So first of all, many of the other players in the solid-state battery space are either startups or small research labs within big companies that published their results. So a lot of what those guys are doing, we have directly from the source, based on papers they published and tweets they've issued and the websites they've put up. So we know what the numbers are, they're sharing. And the other way we have information about this is not just by reading papers, but remember when we started the company, we were looking for the solid-state material, we didn't have an answer back then 10 years ago. So we literally had to go through many, many different materials in our own lab. We went through -- we made lots of sulfides. We made lots of polymers. We did a lot of work on a lot of different types of approaches. And in doing that work, we just were able to first-hand understand what the limitations were and what the issues were. So when people talk about the sulfides, that's a pretty popular class of material. The sulfides have one big advantage, which is that they're very highly conductive. Almost -- they're about the same conductivity as today's liquid electrolytes. That's what made them -- that's what put them on the map. People got really excited that we have solid-state materials that conduct lithium-ions as well as liquids can. The problem is, sulfides, A, in our work, just -- we concluded they would not prevent (inaudible); and B, they're the least stable of the commonly used solid-state materials. So if you go above, say, 2.4 or so volts, below 2.2 volts or so, you see fundamental instabilities leading to chemical side reactions and impedance or resistance growth, which eventually obviously kills the cell. So -- because the capital anode, both are at higher and lower voltages respectively compared to the sulfides. So we did a lot of that work in these materials. That's what's given us the confidence to know that this is not going to be an easy problem. And people, many people out there, many groups are working on material systems that, in our view, are dead ends, where we hope for their safety, they can find ways to make them work. And certainly, the market is big enough to where, multiple players will absolutely be able to play in this space. It's such a massive market, but having other entrants is in no way going to reduce our opportunity. But to be candid, we just haven't seen anything out there that's compelling. One thing we will point out is that a lot of people make claims, a lot of people have announcements. But very few people actually have shown data. And of the ones that have shown data, the data -- it makes clear that it's compromised test conditions, right? So if you look at the key requirements, we had mentioned in that solid-state basket kind of overview, you need to have, as also separate that can run at high current densities, like you have to drive the car and they charge fast in 15 minutes. You need to run at regular temperatures, like 30 degrees Celsius, not just elevated temperatures like 70, 80 or 60 degrees Celsius. And you need to have long-life, that's to go 800,000 cycles with minimal regulation. And no single player that we are aware of, other than what we've shown, has shown data comparable to that. So this is also why we talked about the fact that building multi-layer cells with a building block there that isn't capable, it's just not -- it doesn't -- it's not a sound strategy. You're not going to -- if you can't make a single-story building stand up, you're not going to solve that problem by trying to make a multistory building. So that's kind of how we know about these competitive alternatives. It's a combination of having seen papers published by those groups directly. And then our own work in many of these material systems in our own labs. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- And our next question comes from Joseph Osha from JMP Securities. -------------------------------------------------------------------------------- Joseph Amil Osha, JMP Securities LLC - MD & Equity Research Analyst [40] -------------------------------------------------------------------------------- Let me add my thanks to everyone else for such great disclosure. A couple of questions. You've got a nifty chart in your industry overview showing different cathode materials. And that kind of begs the question on, obviously, you're trying to go with more of a commodity solution there. But has there been any, sort of, interesting learning or levers that you're finding you can pull in terms of the cathode material? And then I do have a follow-up. -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [41] -------------------------------------------------------------------------------- Yes. I mean I think one of the things that we pointed out is that our system is relatively cathode-agnostic. What that means is, once you have a solid-state separator that works, you can use any cathode. I would go further. I would say not only is it cathode-agnostic, but you can actually -- with this kind of a system, you open yourself up to a broader range of cathodes than can be used in conventional cells, for the simple reason that our solid-state separator provides an electrical isolation between the cathode and anode. Now in a normal cell, if you remember our schematics from our various presentations, you have the cathode layer, you have the polymer separator, which is porous and the anode like carbon or circuit layer, and remember that there's a -- the whole cell is flooded with a liquid electrolyte, which is the solvent through which lithium-ions move up and down, well that liquid is in contact with both the cathode and the anode, which means that it has to be stable at both the low voltage of the anode and the high voltage of the cathode. And it's very hard to find materials in nature that have that wide a stability window relative to voltage. So when you isolate the cathode to just the cathode by having an electrical insulator, which is our separator, between the anode and cathode, you now no longer need to have materials that are stable to low voltage. So that actually allows you to potentially use a broader -- to select from a broader universe of materials for the cathode and cathode length. So that was a long answer. But the short answer to your question is, we have a lot of patents on different types of cathodes. If you look at our patent portfolio for (inaudible) and you'll see a ton of patents on a class in tool known as the metal fluorides, which is a conversion chemistry. Those are on some of the highest energy density material effect on that chart you're referring to, that shows a dozen cathode materials. Those are the ones on the extreme right. But we didn't see a need to try to commercialize that day one because the solid-state segment with the lithium metal anode gives you enough of a win to where we could focus on just getting that to market and then having the new cathodes be sort of new materials that provide further growth from there. -------------------------------------------------------------------------------- Joseph Amil Osha, JMP Securities LLC - MD & Equity Research Analyst [42] -------------------------------------------------------------------------------- And I assume your customers don't want to mess with exotic transition metal cathodes anyway. -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [43] -------------------------------------------------------------------------------- Well, yes it would complicate a little bit the electrical interfaces that I mentioned earlier. So this way, it's also a simple interfacing the pack, absolutely. -------------------------------------------------------------------------------- Joseph Amil Osha, JMP Securities LLC - MD & Equity Research Analyst [44] -------------------------------------------------------------------------------- Okay. Second question, I mean, another sort of PVD and CVD in your -- whatever processes where you're making layers of things. You add layers, things don't always go right, but in the end, rather than having material be wasted entirely when you can bin it, depending on the amount of imperfections you've got. So I'm just wondering, you're looking at your process, and I've got 36 layers or whatever, and if something goes wrong in layer 35, is there a way to bin that, still use it? Or do you lose the whole thing? -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [45] -------------------------------------------------------------------------------- That's a good idea. I mean, I think once -- at this point, we're just focused on trying to get the overall production volumes up. Over time, that's going to be a great strategy that's used, obviously, very effectively in the world of semiconductors, right? And if you have a unit that, that doesn't meet the specs for one application but does meet the specs of a different application, you can absolutely bin it. And instead of scrapping it, you can just use it for that lower value applications. Those are exactly the kind of things that we plan on doing over time. I think right now, we're just kind of focused on this increasing kind of the base level of production, using more sort of higher taper tools, more automation, more kind of continuous flow tools in the process. -------------------------------------------------------------------------------- Joseph Amil Osha, JMP Securities LLC - MD & Equity Research Analyst [46] -------------------------------------------------------------------------------- Okay. Great. And then my last question, sorry for the multiple questions. I know you had said that all of the initial learning is around the pouch cell form factor. I mean, has there been any additional thinking on whether this could work in a prismatic or a cylindrical form factor? And that's it for me. -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [47] -------------------------------------------------------------------------------- No, good question. No, so we have said that we don't expect to see this could be used in cylindrical form factors. Even though our separator, as we've shown images of, is relatively flexible for a ceramic. We actually had a technician bend it without damaging the film. We don't intend to actually wind it into a (inaudible) or (inaudible) sort of thing. Both prismatic pouch and prismatic can cells though are very much on the radar. And at the end of the day, we will work with our automotive OEMs to pick the packaging format that best meets their applications. So we're not -- there's no religion on that at QuantumScape. Our value creation resides a lot on the materials that go into the battery, into the cell. How you package it, we're going to let our OEMs have a significant role in helping us -- helping guide us there. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- And this concludes the Q&A portion of our call. I'll now turn the call back to Jagdeep Singh for closing remarks. -------------------------------------------------------------------------------- Jagdeep Singh, QuantumScape Corporation - Co-Founder, CEO & Chairman [49] -------------------------------------------------------------------------------- Yes. I mean, I just want to say thank you, everybody, for joining us on this call today, our first earnings call. And we look forward to reporting our progress to you over the rest of the year. We will plan or using the same format for our subsequent calls. We will issue a shareholder letter that highlights the progress for the quarter. We'll have a short earnings call, which will present a few highlights of the shareholder letter and then really spend most of the time on Q&A. I look forward to continuing to work with everybody going forward. Have a great afternoon. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Thank you for joining us today. This concludes our call. You may now disconnect.