Good day, and welcome to QuantumScape's Second Quarter 2021 Earnings Conference Call. John Saager, QuantumScape's Head of Investor Relations, you may begin..

Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape's Second Quarter 2021 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 the Safe Harbor provision for forward-looking statements that is posted on our website and as part of our quarterly update. Forward-looking statements generally relate to future events or future financial or operating performance.

Our expectations and beliefs regarding these matters may not materialize. Actual results and financial theories are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements for the reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed by the difficulty in predicting future outlooks.

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..

Thanks, John. Welcome to our earnings call for the second quarter of 2021. Earlier today, we published our shareholder letter summarizing the major developments from the last quarter. I'd like to briefly describe a few of the highlights here.

First and most significantly, we are excited to report that we have now built and are currently testing our first 10-layer cells in our commercially relevant form factor.

In the shareholder letter, we published preliminary data from our cycle life tests and early capacity retention and cycling performance remains similar to what we've shown for single and four-layer cells. Our goal was to have 10-layer cells by the end of 2021, so we are encouraged to have our first 10-layer cells this early.

To be more specific, the development of 10-layer cells has been the result of a number of concrete improvements to our separator manufacturing process. Taken together, these improvements result in a step change increase in both separator quality and consistency.

As we baseline these improvements, we expect positive knock-on effects to accrue to our development process as we progress through our manufacturing scale-up road map.

As we've said since first going public, separator quality and consistency are key technical parameters and this step change improvement is an encouraging sign that our focus on this area is paying off. To put this achievement in context, it's helpful to think about how far we've come. In December 2020, we showed our first data on single layer cells.

Then in February, we showed our first four-layer cells. To now be able to share and early look at full-size 10-layer sales in July is very exciting to us, and we believe that the rapid rate of progress to this point bodes well for our development plans going forward.

Another important development, we made and tested our anode-free lithium metal cells with a low-cost iron phosphate, LFP cathode, and confirmed that our chemistry and cell design is compatible with LFP.

We believe this demonstrates the commercial flexibility of our cathode agnostic solid-state lithium metal platform, which allows us to extend our product offering to a broad spectrum of the automotive market.

In addition to these exciting technical results, much of our focus this past quarter has been on installing high-volume manufacturing and automation tools on our engineering line as a precursor to the build-out of our pre-pilot QS-0 facility.

Such high-volume tools will allow us to further refine our manufacturing process, reduce variability, and feed our learn fast and iterate development process as we continue to work towards accomplishing our year-end goals.

For example, we expect our high-volume, continuous flow of heat treatment equipment to improve separator production throughput by an order of magnitude over the current process as well as significantly improve the quality of our separators as a result of more uniform processing. Just as important as our tools is our team.

We've grown our company headcount by 20% over the last 90 days with a particular focus on attracting experienced high-tech manufacturing professionals. Among many others, we are pleased to welcome Celina Mikolajczak, from Panasonic and Tesla, as our VP of Manufacturing Engineering; and Clayton Patch from Micron Technology, Inc.

and IM Flash Technologies as VP of Manufacturing. Our focus for the rest of 2021 is to build many more 10-layer cells to collect performance data and comprehensively characterize and optimize the cell design. In addition, we will continue working closely with Volkswagen and other customers as we push towards next year's customer sampling targets.

Lastly, I'd like to take a moment to look at the bigger picture. This last quarter has seen an incredible volume of electrification announcements from automakers all over the world with a growing number committed to phasing out combustion engines entirely.

This comes as governments across the world are tightening restrictions on combustion engine vehicles and accelerating the pace at which automakers are required to switch. The EV market is seeing enormous growth in major markets and this growth will set to continue over the short and long term.

But it's also important to keep in mind that EV sales are still less than 5% of all new cars sold. And in some ways, the first 5% is the easiest to address with current technology.

We believe that selling EVs to the remaining 95% of car buyers will require batteries that are not just marginally better than today's standard, but significantly better on key metrics such as range, charge time, cost and safety.

We believe the automotive market is starting to appreciate that incremental progress in battery technology will ultimately be insufficient to meet the requirements of drivers, necessitating step function improvements like those delivered through our anodes-free lithium metal approach.

Although there are challenges ahead of us, we are confident that we have the team, resources and fundamental technology to overcome them. And every major hurdle we clear becomes a moat that strengthens our competitive position in the race to capture the next-generation battery market.

In short, we are encouraged by the results we've seen in this quarter. And we are excited to continue our progress towards commercial deployment of our technology and share more developments with our shareholders in the months ahead.

With that, I'll hand it over to our CFO, Kevin Hettrich, to say a few words on our financial performance before we open it up to Q&A.

Kevin?.

Thank you, Jagdeep. In the second quarter, our operating expenses were $50 million. Excluding stock-based compensation, operating expenses were $38 million. This level of spend was in line with our expectations entering the quarter.

The full year, we expect cash operating expenses to be in the range of $130 million to $160 million, consistent with our guidance from last quarter's earnings call. CapEx in the second quarter was approximately $30 million.

For the full year, we now see CapEx tracking higher than previous guidance of $130 million to $160 million, primarily due to a pull forward of the timing of QS-0 pre-pilot manufacturing line spend from 2022 into 2021. This reflects progress setting specifications, engaging with vendors, ordering equipment and advancing facility projects.

Our overall spend for QS-0 remains in line with our previous expectations. Our plans to end this year with greater than $1.3 billion in liquidity also remains unchanged. We'll update CapEx guidance for 2021 in the Q3 shareholder letter, when timing on payments related to QS-0 comes into clearer focus. QS-0 is a vital step in our growth.

From QS-0, we plan to produce battery cells for R&D test cars in 2023 and to establish a mass manufacturing system blueprint. Learnings from QS-0, we believe, will help derisk our QS-1 scale-up. With respect to cash, we spent $63 million on operations and CapEx in the second quarter.

We'll update guidance for full year free cash flow burn in the Q3 shareholder letter. Our company achieved progress on development and manufacturing while maintaining a strong balance sheet. We ended the second quarter with more than $1.5 billion in liquidity.

We continue to expect to exit 2021 with over $1.3 billion, sufficient capital, we believe, to fully fund QuantumScape through initial QS-1 production and additionally contribute to the subsequent QS-1 expansion.

Our GAAP net income for the quarter was $81 million, including the impact of $131 million in noncash fair value adjustment of the assumed common stock warrants. Excluding this noncash adjustment, the net loss for the quarter was approximately $50 million, in line with expectations.

We're excited about the progress this quarter and look forward to the opportunities ahead. We'd like to thank our investors for supporting our mission to commercialize our solid-state lithium metal batteries and to help accelerate the mass market adoption of electric vehicles.

One final comment regarding the recently announced public warrant redemption before passing back to John. Of the 11.5 million public warrants originally issued, most have already been exercised. As of the recent redemption press release date, only approximately 1.5 million remain outstanding.

We believe redemption of the public warrants is an important step to further simplify and streamline our capital structure. For more information, please review our press release and 8-K filing on July 23. With that, over to you, John.

John?.

Okay. Thanks, Kevin. We'll begin today's Q&A portion with a few questions we've received from investors over the Say app and in our IR inbox..

Our first question is, if you had to convert a traditional lithium-ion manufacturing facility to a QuantumScape facility, how would you do it? How much would the cost savings be versus building a new factory from scratch?.

Yes, John, the first thing I'd say is that given the demand for batteries that we're currently seeing and the supply constraints, no one is really talking about repurposing factories. Current factory capacity will continue to be needed going forward and new factories need to be built each year to meet the growing demand.

Our default plan will be to build new factories for QS-1 and QS-2. But if you did want to repurpose lithium ion factories, the main changes would be; first, we don't need anode manufacturing line since all designed with anode less. This would allow us to reuse anode coaters with cathode coaters, increasing the capacity of the line without adding cost.

Second, we'd also reuse existing stacker tools for prismatic cells to make anode cells. And finally, we could simplify the formation area since we don't have the need to form an anode SEI that’s AI given we don't have anode.

So, we believe we'll be able to leverage most of what you find our lithium-ion factory and get commensurate cost savings if we were to go to that route..

Okay, makes sense.

What gives you confidence you'll be able to manufacture at scale? What processes are unproven or required changes versus today's lithium ion facilities?.

And so fundamentally, the main difference between our approach and conventional lithium-ion manufacturing is that we have this unique ceramic separator that enables us to use a pure metallic lithium anode.

So, what gives us confidence that we can manufacture at scale is two things; first, the fact that this sector is based on precursor materials that are earth abundant with multiple suppliers on multiple continents; and second, the tools we use to make this separator are already used at scale in either the battery or ceramics industries today so we can leverage the scale of those industries without requiring new custom tool development..

The remainder of these questions are from the Say app. Sales of stock by key team members are being perceived by some as extreme with one shareholder claiming that our CTO, Tim Holme, sold 50% of his holdings. Noting that our Chief Legal Officer sold shares and our Chief Development Officer sold two-third of his shares.

So the question becomes, is there anything to read into those share sales? And can you comment on the size of the share sale?.

John, first, the percent of sale references in the questions are not accurate to correct the record here. As of the end of the quarter, Tim, our Co-Founder and Chief Technology Officer, holds 96% of its prior holdings; as of June 30, 2021, Mohit Singh, our Chief Development Officer, holds 86%; and Mike McCarthy, our Chief Legal Officer holds 83%..

Yes. If I can just add, as I mentioned on our last call, outside of satisfying tax obligations, I remain committed to not selling any shares until we've delivered a prototype in a commercially relevant form factor to Volkswagen..

Okay.

Our next question, how soon will you be going into production? And can you comment on the ongoing discussions you're having with automakers?.

So on the production side, our plans are to go into pre-pilot production with our QS-0 line in 2023 and followed by commercial production in the 2024, '25 time frame. On the customer front, I'll say a couple of things. One is inbound interest remains strong.

And second, in fact, because demand appears to be higher than our near-term plan capacity, we actually won't be able to work with every prospective customer that expressed interest. This allows us to be a little more strategic about which customers we choose to work with.

And finally, I'll add that our policy is not to discuss customer deals until they're final. In addition, many OEMs consider the badly supplier decisions to be proprietary. So how do respect for them, we usually let them be the ones that announced their partnerships..

Since Tesla's 4680 lithium-ion battery cell is advertised as having similar performance to your battery, and it's less likely because of fire versus an internal combustion engine.

What's the real advantage of the solid state cell?.

Yes. So, the Tesla's 4680 incorporates a number of incremental advances, including things like higher metal content on the cathode side, self-pack design, dry electronic processing for cathode manufacturing and so on. But a little bit all of these cathode side improvements are available to us as well since we're cathode agnostic.

So you couple these improvements with our lithium metal anode, you still end up getting better than it entity than the ion because of the elimination of the carbon or silicon enter.

And we don't believe we can do better than an anode-less lithium metal cell on metrics like energy density at fast charge and cost because we believe the conventional carbon or carbon silicon anode is, in fact, a key limiting factor for all those parameters..

What do you see as the most significant tactical challenges to market acceptance and to full scale production?.

So the main challenge is scaling up our separator production, which, as I mentioned earlier, we believe is achievable since the precursor materials are earth abundant commodities and the production processes and tools are already used at scale today.

The second challenge, of course, was to increase our layer count, but our announcement today makes clear that we've already made strong progress on that front. So we feel good about our ability to increase their accounts..

Okay. Our last question from the Say app.

Do you plan to test your battery from the third party to prove all the claims in your reports are true?.

So as we've said before, we believe the best independent testing is testing connected by our prospective customers. And of course, we had multiple customers test ourselves in their labs. However, some investors have still asked that we use a third-party lab to validate our results.

And to be responsive to those investors, I'll say that we have submitted ourselves within total testing, and we'll share results as we have them. I want to point out, though, that we're -- we don't intend to do this for every generation of ourselves as our focus remains on providing sales to our customers..

Okay. Thanks so much, guys. We're now ready to begin the Q&A portion of today's call. Operator, please open the lines for questions..

[Operator Instructions] Your first question is from Rod Lache from Wolfe Research. Your line is open..

Hi, everybody. I wanted to ask you two different questions. One is just you characterized the 10-layer cell as evidence of improvement in manufacturing.

Can you maybe explain that a little bit for us? And in the lab, can you maybe characterize what you were learning on manufacturability? And specifically, any kind of specific data points on the progress you're making on speed of production and yield, just given that you just said that the second challenge is scaling up manufacturing?.

Sure. Hey, Rod, so on the question -- let me answer the question about the manufacturing improvement first. So, the - at the core of the improvement is, as we mentioned, is better uniformity, better quality, better consistency of the films.

That it turns out as one of the critical parameters for better performance on essentially all the metrics that we really care about from cycle behavior to power, low temperature. All those things are improved if you have better quality and better consistency in your films.

So, this new process, which represents, as I mentioned, a combination of a number of improvements on the manufacturing side allowed us to make better films. Better films give us a better yield, which means more of the films that we started are usable. So that helps us deal with the fact that a 10-layer cell requires 10x as many films.

So having more films that are good, it helps there. And then secondly, as you stack up multiple films, if you have nonuniformity, then you can compound the effect of this nonuniformity.. So better quality helps you better achieve 10-layer cells. So, that was the question about the 10-layer. I think, Rod, if I recall, you also asked about scale-up plans.

Is that right?.

The speed of production and yield, just any metrics that you could share with us on the progress you're making there?.

Yes. So one thing we did say in the letter, if you noted it was that the new tools that we're installing, for example, this new heat treatment tool that we referred to and there's a photo, in fact, in the letter of the two, you can see just the physical size and scale of it these are big industrial kind of tools.

That's literally in order of magnitude more throughput than the tools that we're currently using in our baseline process.

So, those are the kinds of step function improvements in throughput that are needed to be able to both provide enough cells for multi-year development as well as provide higher volumes of completed cells to both test internally and provide to our customers.

So that's the reason why we feel like the scale-up progress has been strong over the last quarter..

Okay. Thanks. And just secondly, if I can. The comments you made on this iron phosphate with your technology were pretty interesting. So in the market today, I think that LFP cells are like 20% less expensive, like $80 a kilowatt hour versus $100.

Would it be the same for yourself? So if you were targeting $70 per kilowatt hour cells in 2027 with nickel, would it – could it be in the 50s for iron-based? And is that something that you're sensing from your customers expressing interest?.

Yes. So, I don't think we've given precise guidance on our cost structure, but here is what I can provide. There's two different, I think, parts of the cost that could be helpful for your models.

First of all, of course, as you already know, Rod, on the anode side, we believe there is no lower cost anodes than an anode-less lithium metal design because it doesn't handle it at all. You can't get lower than zero cost there.

When you couple that with an LFP and -- I don't know cathode, excuse me, you then get additional benefits because now the cathode active material is also relatively low cost. The prices, as you know, of the actual active materials, the spot price has fluctuated over time.

Recent prices for normal NMC cathode material may have been, I don't know, low $20 -- low 20s in terms of dollars per kilogram. The price -- the comparable price for LFP cathodes, if I recall it correctly, maybe recently not even in the mid-single digits dollars per kilogram. So that's a pretty significant difference in cost.

And then given that you've already eliminated the cost of the anode with the anode-less design, the cathode ends up being a larger factor of the overall cost, so having a lower cost cathode that actually really helps you there.

So to net it out, I think what we believe is that the cost advantage we laid out in our original model of the 15% to 20% lower cost than conventional lithium-ion cells because of the anodes, we think that roughly holds even for the LFP cells. And so the beauty of coupling a lithium metal anode-less design with LFP is a couple of things.

One is you end with literally the lowest-cost possible design that we know of, you take a zero cost anode and couple that with a very low-cost of cathodes. So you've got a very cost-advantaged cell.

But secondly, you take the fundamental disadvantage of LFP which, of course, is that it doesn't have a lot of energy density and you address that directly by coupling with the same metal and taking it up to a range where now it's approaching that of today's conventional NMC-based battery.

So it's a really beautiful combination, right? You -- in one thought, you end up with a lower -- we believe the lowest-cost solution that we have for these kinds of systems; and b, some are going to address the biggest weakness in LFP, right? So we reported this demonstration really to help the market understand that we are cathode agnostic.

We have the ability to work with whatever cathode our OEMs want, and this is not some kind of battle or race between LFP and lithium metal anode. Those are completely different axes of the cell multidimensional space. And we can advance on both of those axes simultaneously.

So to the extent that LFP becomes important for a certain subsector of the automotive market, we believe that a lithium metal anode design paired with that LFP becomes the best possible LFP, and that's what's exciting by that result..

Great. Thank you..

Absolutely..

Our next question is from José Asumendi of JPMorgan. Please ask your question..

Yes, thanks very much. José Asumendi of JPMorgan. A couple of questions, please. The first one with regards to QS-0.

Can you give us some rough timing in terms of when do you expect to have installed most of the machinery for QS-0? When do you spend most of the CapEx for this facility – for that facility? Second, can you give us a sense of how many people you're trying to bring onboard by the end of the year? I mean, your headcount is rising rapidly.

But sort of end of the year, where do you plan to stand? And then three, I think some interesting hires. Can you talk a little bit about the background of Celina coming from Panasonic and Tesla and how she can help you industrialize the production and accelerate that transition to QS-0 and QS-1? Thank you..

Yes. Yes, José, thanks for the question. This is Jagdeep. Let me go ahead and take the last one first because it's relatively safe forward, then I'll hand over to Kevin to take the first two. So we're delighted to have Celina on board.

I mean, she -- as you know, from a background, she ran a manufacturing engineering group at Panasonic, the Gigafactory in Reno, which we believe is one of the largest, if not the largest operating battery facility in the world. But she's not just a manufacturing expert, who's worked with super high-volume production lines at Panasonic.

She happens to be a manufacturing expert who is a battery expert because her previous career before this was very deep in the battery. She started out working at what's now called Exponent, what used to be called Failure Analysis Associates, which was one of the pioneers in battery safety analysis.

She obviously went over to Tesla, where she doing her tenure there. They introduced many of the key models that we associate with Tesla now, and then she went over to Uber.

So she's got just an amazing combination of really deep understanding of battery she can engage with our engineers at the engineering level, but she also understands all of the complexity and sophistication that you need to run a super high-volume battery line where you're making millions of cells on the line.

Because at that scale, little things that you never think about have to be addressed explicitly, things like, are the blades that you're using that cut your films on the right sharpening schedule. I mean, nothing gets on overuse. You have supply chain in order.

There's just a lot of things that you don't have to worry about when you're doing small-scale manufacturing and become real issues that can hold up the line. Having somebody on board who's dealt with all those things firsthand in one of the world's highest volume battery production line is fantastic. Now when you couple that the Clayton Patch.

Clayton is the Head of -- so Celina runs with on manufacturing engineering, which is the group that does all of the engineering for the tools and processes that we use. And then Clayton Patch will run the actual production line and Clayton's backlog comes from semiconductors.

The reason why that's relevant is semiconductors, of course, are very aggressive at using things like metrology and getting data on the processing of the materials to be able to keep the process within the control limits.

And a lot of that expertise is going to be very relevant as we scale up the separator line, even there's a ceramic line, a lot of the metrology techniques we're using are really -- we can leverage some of the techniques in semiconductors to get tight controls over operating constraints and parameters.

So, those two are just examples of the types of hires that we're making that we think are really going to enhance our ability to execute successfully on this next phase of our journey. Let me turn over to Kevin to address the first two questions you asked..

José, thank you for the question. First question was around some of the timeline for QS-0. To answer the question on timeline and operation, we've given guidance that QS-0 will produce battery cells for prospective customers to be put into R&D cars in '23 working backwards, really done most of the machines installed in the CapEx spend in 2022.

As for the second question around headcount, we mentioned in today's letter that we have head count of just over 400. We haven't given guidance as to headcount for the end of the year, but if you could get in the right ZIP code by looking at our cash OpEx and to extrapolate it with that growth.

In the quarter, we spent $34 million on the OpEx, excluding depreciation and stock-based comp, and we stick to our guidance of $130 million to $160 million by year-end, which implies that, that number will be increasing. So if you put those two together, you'll get in our ZIP code of total headcount..

Our next question is from Adam Jonas of Morgan Stanley. Please ask your question..

Thanks very much. A really interesting call, I think that the LFP testing again, also potentially really, really significant.

Can I ask for clarification, you said you believe that using your form factor and LFP battery could achieve 600-watt to 700-watt hours per liter? Curious if you could give us a range of gravimetric density on that as well per kg?.

Yes, I'm pretty sure we had those numbers, obviously, because we did the modeling. I don't have them handy on Adam, but we're happy to make to develop as well. It's a great question. I would expect us to be roughly comparable because you are eliminating the anode layer of the creation of LFP cell.

But maybe we can certainly get back to you on the precise metrics there..

Okay. Could you also remind us that the cobalt content of your cells versus conventional? I understand that's going to be cathode chemistry dependent. But yes, could you give us some of those because it's so much focused on all. Yes, help us out again..

Yes. So the current chemistry that we've been using is the 8-1-1 chemistry. So that will be 10% cobalt. However, there are new chemistries that are being offered by the cathode providers that are even lower cobalt content than that. There are some, for example, that are 7% or 8% cobalt. So that number continues to decline for two reasons.

As obviously, you know, one is it improves the cost profile if you have less and less cobalt. And two, also improves the, I guess, the ESG profile if you don't have a cobalt is mined in certain places that are on the best working commissions. So that's an independent trend that's going on.

The benefit of LFPs, as also pointed out, it's a very slick investment, is that you also have to the nickel entirely. And then having an iron-based cell, iron is, obviously, super abundant material super low cost. And that's what allows LFP to be in those -- in the mid-single digit dollars per kilo band.

But the most important takeaway, Adam, rely, is it -- it's a cathode-agnostic design, right? The fundamental brief that we have is a solid a separate that enables an anodes lithium anode, and you can couple that with whatever cathode happens to meet the needs of the application.

And given the automotive spectrum is so broad from super high-end premium vehicles that have high requirements in terms of range and best charge as well as low-end vehicles where price is the number one selling criteria, and that level of breadth can be fully addressed in a cathode-agnostic architecture like ours..

Okay. Just one final one for me. Jagdeep, you mentioned at the end of the, I think, in one of the prepared questions that you're going to submit yourselves for independent testing and you're going to provide the results at some time in the future.

Can you tell us what testing body and when we might be able to see those results? And again, I'm not understanding that this isn't going to be for every iteration, but it does seem -- I think it'd be -- it would carry a lot of weight and the fact that you'd even consider to do this suggests that you believe it carries some weight as well?.

Yes. So this is a sort of a certified accredited kind of a battery test lab. And we actually have already submitted those cells for test. But testing does take time. Even at 1C, 1C rate, it takes several months to get up to a few hundred cycles. So when we have those results, we will definitely publish them.

But you're right, it is -- even though our belief, as I said in the call, is that what matters the most is the testing that customers do in their labs, I think some investors do feel more comfortable if there's a third-party lab that test it, and that's why we're doing this. So we will definitely publish those results.

And thank you for appreciating the point that we don't tend to do this for every generation of cell. But I think having the basic validation that could be of value..

And these are four layer cells or one layer?.

So, this is really just -- these are going to be single layer cells to just validate the core capabilities of what we call the uncompromised test conditions, right? So, if you cycle okay, at unelevated temperatures, at unelevated, not super high temperature, not super high pressure, high rates of charge and discharge on the cycling like 1C1 and so on.

But we'll publish all that along with the data going forward. We didn't want to get ahead of ourselves and start talking about that too much given that we don't have the results in yet so..

Our next question is from Gabe Daoud of Cowen. Please ask you question..

Thanks for all the prepared remarks so far.

Maybe just on the 10-layer test or so, maybe if you kind of answer this at the last question, but close to 40 cycles or so, when should we expect to see that number get closer to, I guess, the 400 to 500 cycle number and then ultimately get to the 800 number that you guys have targeted for obviously an amount of applications?.

Yes. So I mean, I think, our target remains end of the year. And I think the main point we, I think, made on the call is having those cells that actually be successfully made and go on test and have encouraging early results gives us some level of encouragement that we're tracking to that end of your goal. There is work to be done.

And primarily, that work involves making a lot more of these cells so we can characterize the performance and the behavior of these cells. So, the typical process that we use is we make a lot of cells. We get the data. We use that data to improve the design and the manufacturing aspects of the cell and then retest.

So, all that -- those are the kind of things we expect to do but we now and end the year to basically turn that -- those send ourselves into what we call baseline cells. Also in the letter, we mentioned this learn fast kind of a model. And that's really what we're referring to there.

The idea is to do statistically valid sample sizes that we test so we can actually draw conclusions based on the results of those tests that allow us to modify the design in a way that moves us forward on the vector that we are instead moving on..

Got it. Got it. Okay. That's helpful. And then just a quick follow-up, just going back to the LFP cathode, obviously, a number of OEMs have highlighted the potential to use LFP for lower cost entry models.

And so was the decision to test your cell with an LFP cathode based on a specific request from a potential partner? Or is it really just to highlight again the cathode agnostic nature of the separate? Just trying to get a sense of it was really more of a pull kind of request, I guess..

Yes. I understand the question. We don't -- as I mentioned, we don't talk about customer specifics that aren't finalized or announced. So I won't be able to answer that to take your question. But I think the general idea that there is a role for a low-cost cathode in the automotive market is really what we're responding to here.

So we've been focused on NMC 811 primarily because that kind of highlights the energy density and fast drive benefits that we've been talking about. But we want to make sure people weren't thinking that this lithium metal analysis line is somehow tied to any particular cathode.

And given the sort of resurgence of interest in LFP, we really felt like we had a contribution to make here. Again, remember, as I mentioned earlier, LFP has a number of advantages over the higher energy cathodes, right? It can be -- it's obviously lower cost. It can be more thermally stable. It can have better recycling performance.

It can even be higher power density depending on how you design the cell. But it has one big disadvantage, which is that it's basically low end go density. And that hobbles its applicability to many applications.

So the reason why we want to do demo was made clear that you could take that low-cost chemistry, derive the benefits of the low cost and the stability and the thermal safety and so on. And just couple that with this anode-free design that directly addresses the biggest limitation that energy density.

So the idea of a really low-cost design that happens to be roughly in the same ballpark as today's NMC. Time chemistries, many OEMs, I think, would consider that to be a pretty exciting product offering. So that's the reason why we did that demonstration..

Our next question is from Ben Kallo of Baird. Your line is open..

Maybe just jumping on the LFP just one final time. It's always been a cathode agnostic design. So you're basically just telling us that it works with LFP cathode. It hasn't been like a change rate.

Is that correct?.

I missed the last part of the question, Ben, hasn't been what?.

You emphasized it because of the resurgence or if there was some kind of change in testing because I thought there was always a cathode-agnostic design..

Yes. Yes. It always was a cathode design. It's just -- we didn't want people to think that somehow QuantumScape was synonymous with NMC because our unique contribution is this lithium metal anode-less design, which is enabled by, of course, the solid state separator. And we've said before, as you pointed out correctly, we're cathode-agnostic.

But having actual data where we show actual cells constructed with LFP cathodes and our lithium anodes all except we think just have that point home because those are both interesting cathode materials, and we'll both have a role to play over the next many years going forward..

On the headcount increase and congratulations.

Could you just talk about recruiting in this type of environment with battery capacity across the board being expands hybrid?.

Yes. So we've actually had very good luck with recruiting. I mean, we said, we grew 20% in the quarter alone, right? So if we analyze that rate, that's a pretty rapid rate of growth. And we hired a lot of people during the pandemic era the year last year. And we've been fortunate to see a lot of great candidates come through.

So, we're able to really keep a level of quality of employees that we hire really high. I think that if you are an engineer or scientist working on next-generation batteries, my personal opinion is, there's really no better place to be than QuantumScape because this is not incremental stuff. This is disruptive stuff.

We've shown that the core capability is there based on the data we've already published.

And we have -- because we're so well resourced, we have a really extensive lab in terms of not only battery manufacturing capabilities, but that will test and characterization and metrology capabilities with a lot of tools that scientists, engineers wouldn't readily have access to and many other organizations, whether they're companies or even universities.

So, we feel like having the opportunity to work in such a fully equipped lab that's doing cutting edge work has really helped us attract some great candidates. The two that we spoke about at the senior level, obviously, Celina and Clayton the manufacturing side are just examples, but they're just really the tip of the spear.

There's many, many people that we've hired over that last year that have allowed us to maintain our momentum going forward here..

And then lastly, just with the new entrant to the public markets and the private companies fundraising too.

Has that changed behavior from your customers? Or is it kind of like a pilot across all different products right now? Is that the stage we're in? And how do you see that evolving for people to pick their? I think, their horses, I guess, for the lack of a better word to go with on the technology front?.

Yes. I mean, here's the way we see it, right? I mean, I'll give you obviously our opinion. I mean, there's a few alternatives if you're an OEM are looking for a next-generation type of way through chemistry, right? There's other solid day based approaches other than what QuantumScape is doing. For example, there's a sulfide, there's a polymers.

The problem with those approaches is that none of them has really shown that they can prevent dendrite under the types of uncompromised conditions that we keep talking about, right, one hour charge of discharge, 25 to 30 degrees Celsius temperatures, three to four atmospheres of pressure as opposed to over the elevated templating pressures, 100% debt to discharge.

Every previous, every attempt that we've seen for solid state using other materials, has not been able to cycle on those commissions. So if someone has got that, that would be exciting news, but we haven't seen that. The second category is people that are just using liquids with lithium metal to try to make that work.

And you can get -- it's easy to get results with liquids at low rates of power because dendrites are an exponential function of power. So at no power, you can reduce it exponentially. But come higher powers, that propensity grows exponentially.

So -- and then that's not even taking into account the impedance of the resistance growth that happens from the chemical side reaction between the liquid and the lithium metal. So we think those approaches are not going to be viable for applications like automotive where high power is required.

And there may be an application for those in low power type scenarios that will be the best case outcome for a liquid-based lithium metal approach. And in the final, I think, category is acting organ silicon. And silicon is a fine approach to incrementally improve the density of lithium metal -- lithium-ion cells.

But in the day, even if you had 100% silicon anode with no carbon, no binder, no out in it, just the math of that silicon alone would double the mass of the anode because silicon has atomic number 28, lithium anatomic number 7.

So even if you held four lithium atoms for every one silicon atom, you're still doubling the mass and the weight of that anode. So really, at the end of the day, if you have a working lithium metal and anode-less design, we honestly just don't see a role for any other approach.

So our real challenge is not whether there's a better approach out there, but simply whether we can execute on the vision that we've led out and get it to commercial production. And that's really what we're focused on. And we think that the product reporting on this call is an encouraging sign. It's obviously not done.

We're not claiming that we're shipping, but we believe that it's a signal that the team is, in fact, those out execute. And if the team keeps doing that, I think we have an opportunity to really transform the sector..

Your next question is from Mark Delaney of Goldman Sachs. Your line is open..

First, I was hoping you could discuss more on the manufacturing improvements that you talked about relative to separator manufacturing. And nice to hear about some improvements that you made on the manufacturability of the separator.

Could you provide more details about how similar the current manufacturing progress, [intels] that is, relative to what you think you may use in volume production for separator manufacturing?.

Yes. So let me invest a two different parts. I think obviously, we keep the details of the separated process is really close to the vest because that's really some of our crown jewels, as you obviously know. But I think the net effect of the improvements that we're talking about was to get films that are high quality. And by quality, we mean uniformity.

So there's lots of different non-uniformities that will affect the performance of your separator. And the industry -- the broad industry that's working on these types of materials doesn't fully understand the significance of these forms.

And I can tell you everything from compositional, non-uniformities to morphology non-uniformities to deep activity non-uniformities. These are all things that affect the performance of your films, by some way, I mean the separator ceramic.

And so the improvements that we're talking about were some concrete changes to our process that led to meaningfully better outcomes in terms of quality and consistency. And that's a pretty important point as well. Not only do you want high-quality films, but you want to be able to get those high-quality films very repeatedly. So you get a better yield.

So those are really the net effect of the improvements you're talking about. And then relative to the tools that we're using, if you look at the photos in the shareholder letter, that is an image of a continuous flow heat treatment tool. So every ceramic has to go through a heat treatment step.

But most servers today, a lot of servers they are done in batch sort of processes for heat treatment. And those processes, we believe, are not very scalable. So what we have here is a continuous flow process.

So the separators are run through on a conveyor belt, the seat treatment tool where you have different zones that can apply a different heat treatment profile as the film is run through. And that really is what we believe allows us to have a scalable process is that we don't need these batch sheet treatment tools.

So those are the two key points I'd make to answer your question, Mark. One is the net effect of the improvements we're talking about was to make -- produce a better quality films with better consistency.

And two is on the scale duty side, these continuous flow treatment tools that we are now deploying, we believe, will really allow us to increase the throughput. And also, frankly, to further increase the quality because we think these continue for tools have better precision in terms of the heat treatment profile that we can apply..

That's very helpful. And for my second question, I was hoping to talk about the testing the Company had talked about last quarter about cells with zero externally applied pressure, which I think could be relevant potentially for cells that can be sold into the consumer electronics industry.

I apologize if I missed it, but I didn't hear an update on testing of cells with zero external pressure applied. So is there any progress you can share on that front? [Technical Difficulty].

Excuse me, this is the operator. I apologize, but there will be silence as the speakers' line got disconnected. We will resume in a short few. One moment. [Operator Instructions].

Kevin, do you want to hang that up on it? Operator, can you hear me?.

Presenters, we are now back in the main conference room..

I apologize for that the line got dropped.

Can everybody are back on? So I assume we're back on, right?.

Yes, we are back in the main conference. Presenters, you may continue..

So Mark, I don't know if you're so long, but can you -- did you hear the answer to your question?.

This is Mark. I'm not sure if you can hear me, but I had asked about potentially providing an update about the testing of cells with zero external pressure. I don't know if you got that question or not, but I didn't hear an update..

Yes, sorry about the drop, I guess, technical difficulties can happen on these calls. So thanks for bearing with us, guys. So I did answer the question, but it sounds like it got dropped at the beginning of my answer. So I very quickly summarize the answer. The answer to your question is, yes.

The reason why we showed that zero-pressure data was exactly to be able to make clear that we can address the consumer application where playing pressure is not an option because there's not enough volume in those consumer devices.

But having said that, we also said that we don't want to get distracted from our primary focus, which, of course, is the automotive sector. That focus has served us well so far. And we want to continue to execute on that automotive application before we sort of go too far on the path with consumer devices.

But the fact is that because we've shown that the system can work under pressure. Those applications are really in the scope of the ones we can target. I think you had another question as well, Mark, besides that one.

What was the second question you asked?.

No. That was it for me. So I appreciate all the help..

Yes, my apologies for the drop. It looks like everybody has dropped. I did that drop back on. I also wanted to say that we did -- the team did get an answer on the LFP chemistries, and Kevin can address that very quickly..

Sure, Adam, you're asking about the gravimetric improvement with the QuantumScape approach.

We understand conventional lithium-ion LFP cells are around 170-watt hours per kilogram, the best cells right now for the QuantumScape design combining a solid-state separator in lithium metal anode with an LFP cathode, we believe we would be in the mid-200s per 1 hour kilogram..

And our last question is from P.J. Juvekar of Citigroup. Your line is open..

You say that you're cathode agnostic, whether it's LFP or NMC, et cetera.

Now each of those cathodes have different lithium and nickel content, does that change the lithium-ion flow informing the lithium anode in the battery? And if it does, how did you overcome that issue?.

Yes. So the -- again, the beauty of the approach is that the lithium that makes up our anode is the exact same lithium that's normally cycling back and forth in a normal lithium-ion battery. The only difference is that instead of that lithium intercalating into or defusing into that carbon particle or silicon particle as the case may be.

There is no carbonation circulate into. So it simply forms a plate retrofitting of pure metallic lithium.

So relative to whether there's any difference in the total lithium, by definition, both the LFP chemistry and NMC chemistry, any lithium-ion chemistry is going to be able to have lithium-ions come out of the cathode to roll through that right and get to the anode. The only difference here is what happens when that lithium get the anode.

And in our case, that lithium is forms the layer of pure metallic lithium. In the case of lithium ion, the lithium that goes to the anode is held in place by this scaffolding, if you will, of the graphite anode. So, I take six common items to hold on lithium anode. And each of those ions is held in place.

But that's one of the reasons why it's called lithium-ion because that anode is kind of held in place in this ionic state. We're in no case by doing away the carbon and silicon, the lithium-ion can as lead each other and form a metallic bond, and that's why it becomes lithium-metal.

So yes, it is cathode agnostic, and there's the same lithium that would otherwise be using into the anode is simply forming that layer in the metallic lithium..

Okay. I guess my question was a little different, but maybe I'll come back later.

Now with this LFP cathode compatibility, how does the size of your TAM change in terms of your total market?.

Well, I think the way to think about this is that there is an overall market for the transportation sector in terms of the number of vehicles sold in the year. And there is a wide range of vehicles that have different requirements. By enabling LFP as a cathode, we can address a broader spectrum of that overall market.

So there are fewer applications within the vehicle market for which this level anode and our based approach would not be a fit. You could argue that without LFP, there are some low lab applications where cost is the only thing that matters even if the energy density isn't at world-class levels.

But with the LFP solution that we have, we can deliver -- we can serve those low-cost applications while improving the range and the intensity that they get with the LFP battery..

And lastly, you mentioned that LFP, we know that has lower power density, which means range. How much can your battery improve that range? Thank you..

Yes. So if you look at the shareholder letter, conventional LFP, we said volumetrically is on the order of 400 or so watt hours per year.

And we believe with the QuantumScape lithium metal anode-less design, that number gets pushed up to believe 600-and 700-watt hours per liter, which is significant, not only because it's more than lithium-iron phosphate with carbon numbers, but because it's actually now approaching the range of conventional NMC batteries.

So it's a very exciting combination of low-cost and without the penalty of energy density that you have in terms of LFP plus thus far. So that's one of the reasons why we're excited about that demonstration.

I think really, the three demonstrations we made today are not the LFP with lithium metal and then the 10-layer cell together, I think, are at both very encouraging in terms of our ability to serve the full market..

And there are no further questions on queue. Presenters, you may continue..

So I want to thank everybody for taking the time to join our call today. Again, as I mentioned, we're excited about the results that we shared today. The 10-layer cell result we believe provides strong evidence that we are tracking well to the scale plans that we made out earlier this year.

And then the LFP result demonstrates that the system is in fact cathode agnostic, and we can leverage this low-cost cathode to turn it into a more useful high energy, low cost cathode. We are going to stay focused on the task ahead over the coming quarters and years, and we look forward to reporting further progress on the next earnings call.

Thank you all..

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..