Good day, and welcome to QuantumScape's First Quarter 2024 Earnings Conference Call. John Saager, QuantumScape's Vice President of Capital Markets and FP&A, you may begin your conference.

Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape's First Quarter 2024 Earnings 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 as part of our quarterly update. Forward-looking statements generally relate to future events, future technology progress, or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. There are 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 shareholder letter, Form 10-K, and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be QuantumScape's CEO, Dr. Siva Sivaram, and our CFO, Kevin Hettrich. With that, I'd like to turn the call over to Siva.

Thank you, John. At the beginning of this year, we laid out four key goals for 2024 to help investors follow our progress as we move from prototype to product. Begin shipment of Alpha-2 prototype battery cells, ramp our Raptor fast separator production process, begin low-volume B0 prototype production of our first commercial product, QSE-5, and prepare our Cobra process to support higher volumes of QSE-5 in 2025. We announced on March 27 that we started shipments of six-layer Alpha-2 prototype battery cells to automotive customers, which is the first of our four key goals for 2024. This is a key deliverable in our engagement with our prospective launch customer. The Alpha-2 prototype combines higher loading cathodes with our FlexFrame cell format and improvements to packaging efficiency, tighter internal margins, thinner current collectors, and a slimmer design. Alpha-2 is important because, when combined with Raptor films and other refinements and incorporated into approximately 5 amp power design, it represents the core of QSE-5. The Alpha-2 design is intended to serve as an effective demonstration platform for customers to preview important electrical performance capabilities of the planned QSE-5. Customer feedback is the most critical input in the product development cycle as it provides insight into areas that need improvement and strengthens collaboration. In our shareholder letter, we published data on four key performance features of Alpha-2 cells. The first of these is discharge power, which relates directly to vehicle acceleration in high-performance applications. Alpha-2 prototypes are capable of up to 10C discharge rates, which in a 100-kilowatt hour pack would be nominally equivalent to over 1,000 horsepower. We believe this translates to a compelling combination of energy and power compared to conventional lithium-ion cell designs. Second, fast charging is an important feature for EV applications. Improving on previous results, Alpha-2 prototypes have demonstrated the capability to fast charge from 10% to 80% state of charge in less than 15 minutes. Third is low temperature performance. Conventional EV battery performance can be significantly impaired when ambient temperature drops below freezing. Our cells have the potential to offer good energy density and hence range across a spectrum of operating temperatures down to minus 25 degrees Celsius. Last, is the advances in applied pressure. As a reminder, some solid-state battery technologies can appear to deliver acceptable performance when put under high externally applied pressure. We are aware of various solid-state battery groups reporting cycling results using test pressures from 20 atmospheres to as high as 750 atmospheres. Such high pressures are impractical for real-world EV applications. In the Alpha-2 prototype, we have now reduced externally applied pressure to 0.7 atmosphere, within the range currently present in conventional EV battery pack designs, and we believe this allows us to integrate ourselves into existing pack concepts. We continue to target zero-pressure designs for consumer electronics applications. We believe the combination of these capabilities planned for QSE-5 represents an unmatched value proposition. And Alpha-2 represents an important step forward as we work towards ramping up our manufacturing capabilities and improving the reliability performance of our sales. Now a word on our production outlook. Our current-generation separator production process will continue to serve ongoing Alpha-2 sample production for customer shipment and internal testing in Q2. In parallel, increased production from the new Raptor process will allow us to gather larger volumes of cell testing data to validate safety and reliability improvements, accelerate process improvement of downstream cell assembly steps, and begin production of QSE-5 B0 samples. Most of the upstream and downstream automation equipment that serves the Raptor heat-treatment equipment has completed or is undergoing site acceptance testing. The Raptor process has shown encouraging improvements with respect to certain critical-to-quality metrics. In addition to the planned Raptor ramp, we are also streamlining cell assembly processes by simplifying the bill of materials, consolidating process steps, and increasing automation to enable a smooth ramp of cell production. While supporting initial production of QSE-5 prototype cells, Raptor also serves as a learning platform for our next generation of separator production, the Cobra process. Cobra is intended to combine the fundamental process innovations pioneered by Raptor with specialized equipment capable of realizing the full potential of fast separator production. The Cobra process is necessary to enable higher volumes of QSE-5 prototype production in 2025. Last, a word on our strategic outlook. We remain tightly focused on a singular goal: bringing our first commercial solid-state lithium-metal battery cell to market for electric vehicle applications. Achieving this ambitious goal requires three major elements: differentiated technology, close customer engagement, and methodical execution of our milestones. On the first point, we believe the performance differentiation of our solid-state lithium-metal technology continues to be clear, as successive iterations of samples have demonstrated. On the customer front, we are increasing our focus on intensive collaboration with our automotive partners, including our prospective launch customer. And finally, we continue to pursue a disciplined approach to product development and process deployment. While there is still significant work ahead of us, we are as enthusiastic as ever about our technology and its potential impact, and we look forward to sharing more details over the months to come. With that, I'll hand over to Kevin for a word on our financial outlook.

Thank you, Siva. Capital expenditures in the first quarter were $14.1 million. Q1 CapEx primarily supported low-volume QSE-5 prototype production targeted for later this year, as well as the Cobra process and other equipment as we prepare for higher volume QSE-5 prototype production in 2025. We maintain our full year 2024 guidance for capital expenditures to be between $70 million and $120 million. GAAP operating expenses and GAAP net loss were $131.9 million and $120.6 million, respectively. Adjusted EBITDA loss was $76.2 million in Q1. The table reconciling GAAP net loss and adjusted EBITDA can be found in the financial statements at the end of the shareholder letter. We maintain our full year 2024 guidance for adjusted EBITDA loss to be between $250 million and $300 million. This guidance reflects our efforts to maintain our commercialization timeline while conserving cash and extending our runway, primarily by focusing on process improvements. We ended the quarter with $1.01 billion in liquidity, strongly positioning the company as we transition from prototype to product and prepare for subsequent industrialization. We continue to be prudent with our balance sheet and reiterate our forecast that our cash runway will extend into the second half of 2026. Any additional funds raised from capital markets activity, including under our ATM prospectus supplement, would further extend this cash runway. Longer term, our capital requirements will be a function of our industrialization business model, which we believe could reflect a mix of wholly owned production, joint venture, and licensing relationships.

Thanks, Kevin. We'll begin today's Q&A portion with a few questions we've received from investors or that I believe investors would be interested in. Siva, could you give investors any initial impressions after your first few months as CEO?

John, it's been an exciting eight months since I joined QuantumScape. The first thing I want to mention is that the team at QuantumScape is extraordinary, with a depth of knowledge they have in battery technology and science; equally impressive is their commitment to the QuantumScape mission of revolutionizing energy storage. I've also been very pleased with the level of interest and involvement from the customers. The level of partnership and customer intimacy is genuinely exciting. In terms of scaling the technology, I can see a lot of similarities from my prior experience in semiconductors with the progress that we need to achieve. I can see the path from where we are to where we need to go on defect density reduction, process variability control, equipment productivity, ecosystem development, etc. Finally, seeing the current headwinds in the EV market, I can also see how the fundamental thesis of the company is getting validated. Today's lithium-ion-based battery packs will not meet customer needs on range, charging time, safety, or cycle life of the battery, even given the downward price pressure and marginal improvements made by the industry. It's unclear that there is a path with our current technology to transition from early enthusiasts to more mainstream car buyers. QuantumScape represents the next generation of battery technologies that we think are necessary to make it a compelling choice for car buyers.

Thanks, Siva. On the last point, you mentioned the macro environment and sentiment around EVs. Has any of that impacted QuantumScape's growth plans or customer conversations?

John, what we are seeing is that there is clearly some cyclicality in the marketplace. There are macroeconomic reasons and some geographic variabilities in demand. In addition, there are some manufacturer-specific trends as well. However, over the long term, the secular demand from the marketplace for EVs is undeniable. I see the interest from our OEM customers and the excitement about the progress of our technology. Having said that, we see that the automotive customers are still uncomfortable with the EV value proposition versus traditional combustion vehicles, especially in regards to range and charging capability given the current crop of offerings. A holistic battery solution that is strong on safety, great on the long-term life of the battery, along with better range and faster charging times is required. The variance in the marketplace of conventional lithium-ion batteries does not solve for all these trends. Now do we think the rate of progress in this 30-year-old technology capable of getting there? What we at QuantumScape have demonstrated is a step change from the current solution. Solid state anode-free lithium metal battery technology that simultaneously offers high energy density and high power density, along with improved safety and cycle life. We believe our technology platform will enable EVs to be a compromise-free choice for the majority of the mobility marketplace.

Okay. Great. Narrowing our focus to this quarter. Can you explain how Alpha-2 fits into your big picture development roadmap? And how does this move us towards our ultimate goal of getting into series production?

John, from a big picture perspective, the QSE-5, which is an approximately 5 amp power cell, is the product we are striving to deliver to our automotive customers. The automotive industry uses a series of major stages to structure product development, typically called A sample, B sample and C sample, followed by start of production. We delivered A samples in 2022, and Alpha-1 and Alpha-2 are stepping stones to achieving B sample production by the end of this year. Alpha-1 was completed last year. Alpha-2, which we began shipping in the first quarter, has almost all the same characteristics as QSE-5 other than the Raptor films and final cell capacity. This gives our prospective launch customer the ability to evaluate and provide rapid feedback on the performance capabilities for the cell so we can methodically iterate and improve.

Great. Kevin, turning to you now. How does our current capital runway align with our product development roadmap?

We ended Q1 with over $1 billion of liquidity on the balance sheet and reiterated our guidance of cash into the second half of 2026. Our balance sheet, we believe, is a competitive advantage and source of strength for the company. The capital in our forecast is being invested into things we believe create value: finishing the QSE-5 product targeting approximately 800 watt-hours per liter and 15-minute charge times from 10% to 80% capacity, developing and deploying our Raptor and Cobra fast processes that make our proprietary solid-state electrolyte separator, and installing equipment to serve a small volume, high visibility program of our prospective launch customer, with whom we continue to closely work for the QSE-5 launch. We expect the capital efficiency to improve with subsequent facilities due to the operational benefits of larger scale equipment and process maturity as well as due to business model and capital structure. Some of those options available to us include traditional non-dilutive sources of funding, including debt, customer prepayments, and government incentives. In addition, we have the full opportunity set of business models available, including joint ventures and licensing. Joint ventures benefit from the strength of the partner and reduce CapEx funded by QuantumScape, while licensing enables market penetration beyond the constraints of QuantumScape's balance sheet and operational bandwidth.

We're now ready to begin the live portion of today's call. Operator, please open up the line for questions.

Your first question comes from the line of Joseph Spak with UBS.

This is Gabriel on for Joe. Just wanted to quickly dive deeper into some of the details regarding the commercialization roadmap. You're ramping Raptor by the end of the year and getting Cobra up sometime in 2025 to get high-volume B sample prototype production online. But once that's done, call it about half a year or so of delivering those B sample prototypes and another half year to a year for some final C sample stage. We're probably looking at full commercialization and gigawatt-hour scale production sometime in that end of '26, early '27 period. Is that sort of the right way to think about this?

Gabriel, thank you for the question and the overall picture. Look, we are always focused on both short-term deliverables and longer-term thinking. We are giving strict guidance on what milestones we need to deliver in the short term, meaning in 2024 and 2025, and making sure we hit them every time. We are working very closely with our prospective launch customer, and we probably will allow them to come and tell us when we can talk about it outside. So for now, the guidance we can give you is for all of calendar '24 and calendar '25. At the end of calendar '24, we will have done low-volume B samples, and next year we would go into high-volume QSE-5 B sample prototypes. So that's the guidance we have given outside.

Understood. I appreciate the details there. And just as a quick follow-up, Kevin. My second question is related to the litigation expense you disclosed in your adjusted EBITDA bridge. Just generally, how are you viewing this on a go-forward basis? I mean, was this just a one-time line item? How should we be looking at this?

Yes. Thanks for the question. The net loss to adjusted EBITDA table found at the end of the shareholder letter includes an approximately $24.5 million expense for the net litigation settlement accrual and legal fees. This is associated with the agreement in principle to settle the securities class action litigation. The pending settlement, once finalized and if approved, will conclude what has been one of our most significant ongoing legal matters, as we've described in past annual and quarterly reports. The settlement is subject to final documentation, notice to class members, and preliminary and final approval of the court.

Your next question comes from the line of Jordan Levy with Truist Securities.

Thanks for all the detail. Siva, maybe for you to start. The shareholder letter mentions some streamlining of downstream cell assembly processes that include things like simplifying the bill of materials and consolidating the process steps and increasing automation. I think this is in reference to Raptor. I'm just curious, are these all sort of changes that were already contemplated in the Raptor designs? Or are these new developments you've been able to kind of point out as a means of process simplification? Any details around that line in the shareholder letter?

Jordan, I'm willing to take credit for everything. Having said that, many of these were well planned, and these were implemented as Raptor, the upstream and downstream automation steps, are going through site acceptance tests in some cases. The cell assembly steps are coming right behind. In all of those, we are being very methodical. We go back and make sure we run enough of them so that we can get a decent amount of data to establish a baseline, ensure that the process is robust, that there is sufficient margin, and then try to automate them right afterwards. This process continuously trades and moves forward. Alpha-2, just for example, is one such major step where we can get the samples, give them to customers, get their feedback, and then when we get towards the B samples at the end of this year, we would have had one more revision of these. So we have done a good job of continuously streamlining steps of the process where we know we are robust in automating them and then moving to the next step. That's what you are seeing.

That makes total sense. Appreciate that. And then, Kevin, maybe just for you. And this may be related to that litigation expense you all disclosed, but just seeing where OpEx came in for the quarter, I'm assuming that might have been in there, so that might have accounted for the step up. But maybe just thinking more broadly, as you all get Raptor and Cobra going, I know you reiterated your EBITDA guidance. I'm just curious how we should think about the shaping of OpEx. Does that change at all as some of these processes start to come online?

Yes, we did reiterate the adjusted EBITDA guidance of $250 million to $300 million loss in the year. You could think of it as broadly slightly monotonically increasing over the year as we ramp up volumes of the QSE-5 prototypes.

Your next question comes from the line of Jed Dorsheimer with William Blair.

Siva, you have Mark Shooter on for Jed. Congrats on the first quarter as CEO. Just a question about the fast charging. I know that's key for EVs and the data is pretty impressive from 10% to 80%. I know lithium metals theoretically have better charge transfer kinetics than graphite, but in practice, it's hard to control that surface lithium to avoid your current density hotspots. So I'm wondering, how is cycle-life impacted under the fast charge testing protocol you guys are seeing?

Mark, thank you. That's a very perceptive question. This is something that we have repeatedly shown. We have data that we have demonstrated both in our sister cells and earlier on with our customer talking about it with their data. That's a substantive number of cycles with charging that is much more than the normal C/3 that a car would typically experience day-to-day. So we have shown substantive fast charge data and cycling together. The truth of the matter is, this has been one of our core innovations, making sure that the ceramic separator, along with lithium metal plating on the other side in an anode-free configuration, is done repeatedly at a reasonably fast charging cycle. This is one of the major differentiators of the technology. As you can see in all of the data that we have presented from Alpha-2 in the shareholder letter, we have demonstrated that for you in prior data, and we continue to validate it.

Awesome. That's a significant achievement. Thanks for the color. My next question goes toward Raptor. I'm wondering if we could dig in a bit on the improvements. Do you see it as more so a cost and speed improvement for Raptor and Cobra, or are there other benefits like a potentially thinner separator?

Yes, so Raptor and Cobra are clearly an order of magnitude for Raptor, and another order of magnitude improvement is shown in the last earnings letter on the productivity advantage of the two. Raptor is better, and Cobra is much better in terms of throughput and equipment footprint per unit output. That is very good. However, what we continue to see is, in the case of Raptor, some true critical-to-quality metrics that are also better on Cobra. We do expect that both Cobra and Raptor will continue to help us achieve our targeted energy density and power density that we've discussed.

Your next question comes from the line of Davis Sunderland.

I know it's only been a month since you made the announcement, but I just wondered if there's any feedback so far from the prospective launch customer? Or maybe if not, any timeline on how or when this might be communicated?

Yes, we have sent the films to the potential launch customer, as mentioned in our press release. This data will remain confidential, including the full test protocol. That's why we conduct parallel testing in our labs with sister cells and publish that data. We've already shared early results in our shareholder letter, showcasing the performance of the Alpha-2 samples, which are the related sister cells sent to the customer.

Got it. That's very helpful. And maybe just one more if I could add a follow-up. Have you guys seen any changes in the level of engagement with potential customers just as the excitement around EV seems to have turned negative in the last couple of months? Lots of negative headlines, of course. But just how you guys are thinking about new partnerships, if there's been any change on that front?

Yes. I did talk about it in the earlier question that John was asking me on the scripted questions. The interest from the customers that we have been working with and that we truly engage closely with has been very, very good. There has been no let-up in the level of interest or the level of commitment from our customers. We are continuing to work closely with our partners that we have been working with. The overall secular demand thesis has not changed. Clearly, there are some short-term issues. There are headwinds in the marketplace today. There are cyclicality, macroeconomic conditions, geographic changes, and manufacturer-specific differences. But among our customers, the interest in our technology, the commitment to our company, and the enthusiasm with which we are working has remained unchanged.

At this time, there are no further questions. I will now turn the call back over to QuantumScape management for closing remarks. Please go ahead.

Thank you. With that, I'd like to thank you all for joining us today. We look forward to sharing more on our progress in the coming months. Thank you.