Good morning. My name is Mark, and I will be your conference operator today. I would like to welcome everyone to the QuantumScape Corp. Second Quarter 2024 Earnings Call. All lines have been muted to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I will now turn the call over to John Saager, QuantumScape's Vice President of Capital Markets and FP&A. John, you may begin your conference.

Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape's second 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 theories 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 the reasons that we cite in our shareholder letter, Form 10-K, and other SEC filings, including uncertainty 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.

Thanks, John. I'm excited to provide an update on our activities since our last earnings call. First, we recently announced a landmark agreement with PowerCo, the battery company of the Volkswagen Group. This deal reflects the value created by consistent execution on our development roadmap and customer validation of our technology. We forecast that this capital-light licensing arrangement lengthens our cash runway into 2028, an extension of 18 months relative to our previous guidance. Upon satisfactory technical progress, the deal allows for a $130 million prepayment of royalties to QuantumScape in exchange for a non-exclusive license, covering an initial production volume of 40 gigawatt hours per year with an option to expand to 80 gigawatt hours, enough for approximately 1 million vehicles per year. The license covers the technology platform used in our upcoming QSE-5 product. This agreement is a major step in our global scale-up strategy to bring our solid-state lithium-metal battery technology to market for electric vehicles. By joining forces, we can combine our cutting-edge technology with PowerCo's capabilities in industrialization and manufacturing. Under this licensing model, we can leverage our partners' investment of billions of dollars to industrialize our technology while maintaining our focus on innovation and development. We believe that this capital-light model will enable us to reach gigawatt-hour scale faster, and when combined with financial prudence, will allow us to extend the cash runway into 2028. We see this collaboration and this intellectual property framework as a potential template for future deals with other customers. In addition to the deal with PowerCo, our customer engagement continues to be robust. We have shipped Alpha-2 prototype cells to multiple customers in the automotive and consumer electronics sector. We also continue to work closely with our prospective launch customer for the QSE-5 cell. The core innovation that will allow our solid-state lithium-metal battery technology to be manufactured at gigawatt-hour scale is our fast separator production process, which we are rolling out in two stages, Raptor and Cobra. We're on track to complete our ramp of the Raptor process, one of our four key goals for the year. The Raptor process has also been the important testbed for key element of Cobra, and our progress on the Raptor has allowed us to begin shifting increased resources towards Cobra development. We are starting to take delivery of Cobra equipment, in line with our annual goal. Next, we published an update on safety testing of our prototype battery cell. One noteworthy result from prototype cell testing was demonstrating thermal stability up to 300 degrees centigrade. For reference, we tested conventional high-energy lithium-ion cells, which burst into flame between 174 and 185 degrees Celsius. In our discussions with our customers, safety is a key differentiator. A cell that can offer a fundamentally safer chemistry not only adds value to existing applications like automotive and consumer electronics, but also potentially opens up new markets that current technology is unable to serve effectively. Next, let me hand things over to Kevin for a word on our financial outlook.

Thank you, Siva. Capital expenditures in the second quarter were $18.9 million. Q2 CapEx primarily supported equipment purchases in preparation for low-volume QSE-5 prototype production, as well as the Cobra process and other equipment as we prepare for higher-volume QSE-5 prototype production in 2025. We expect to be on the lower end of our full-year 2024 guidance for capital expenditures of between $70 million and $120 million. GAAP operating expenses and GAAP net loss were $134.5 million and $123 million, respectively. Adjusted EBITDA loss was $72.5 million in Q2. We maintain our full-year 2024 guidance for adjusted EBITDA loss to be between $250 million and $300 million. We ended the quarter with $938 million in liquidity. As we mentioned previously, our long-term capital requirements are a function of our commercialization pathway. We believe the licensing deal with PowerCo offers a capital-efficient path to market, and we now project our cash runway to extend into 2028, an 18-month extension relative to previous guidance. Any additional funds raised, including under our ATM prospectus supplement, would further extend this cash runway.

Thanks, Kevin. I'd like to look at how the PowerCo deal affects our strategic outlook. The secular trend towards EV adoption continues, but despite decades of development, existing conventional battery technology still cannot address the requirements of large segments of the automotive market. There is a clear need for a next-generation battery to drive broad adoption of EVs, and this need represents extraordinary market opportunity, potentially hundreds of billions of dollars annually. We believe that our solid-state lithium-metal platform is the clear leader in the next-generation battery race, and to seize this massive market opportunity, a global manufacturing ecosystem must be developed. This is where our collaboration with PowerCo fits in. They can bring their industrial expertise and operational excellence to bear on the formidable practical challenges of producing our next-generation battery platform at the gigawatt-hour scale. This non-exclusive deal also allows us to pursue additional opportunities while maintaining our tenacious focus on innovation and return on invested capital. Above all, we see this collaboration with PowerCo as an opportunity to quickly and efficiently get our battery technology into series-production electric vehicles. The inherent leverage of this industrialization model takes advantage of the investments being made by automotive OEMs such as the Volkswagen Group, and our highly differentiated technology allows both partners to benefit from this collaboration. Moreover, under this model, our market share is not directly constrained by the size of our balance sheet or the bandwidth of our operations team. Though significant work remains to achieve our ambitions, we are excited to begin our collaboration with PowerCo. It's the first step in the next phase of our journey to revolutionize energy storage and create exceptional value for our shareholders. We look forward to reporting on our progress in the months to come.

Thanks, Siva. 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, why is the PowerCo deal so significant for QuantumScape?

John, in my mind, there are four powerful reasons why this deal is so important. First, this demonstrates the value we have created for our customers and shareholders with our solid-state lithium-metal platform. Second, by combining our unique technology with the global capabilities of the Volkswagen Group, we can get our technology to gigawatt-hour scale and into series-production vehicles as rapidly as possible. Third, this deal is non-exclusive, and it provides a template for future deals with other customers. And lastly, the capital-light arrangement presents the most efficient allocation of our resources.

Thanks for that. Kevin, turning to you now. Siva mentioned the capital-light approach. How is this agreement better for investors than the joint venture model?

This deal allows both PowerCo and QuantumScape to focus on respective strengths. Benefits of the licensing model for us include increased operating leverage, a reduction in our forecast capital requirements, and an ability to utilize our partners' balance sheet. Additionally, an exciting benefit is that the potential scale of this deal is roughly four times the size of the prior joint venture. A licensing model that creates value for both parties has to start with differentiated technology. Our QSE-5 technology and its targeted benefits to safety, energy density and power, we believe achieve that strong performance differentiation and creates an opportunity for both QuantumScape and PowerCo with an excellent financial return. In the near term, one of the benefits we discussed in the letter is that it helps extend our cash runway by 18 months relative to prior guidance.

On that last point, can you talk in a little bit more detail about how this deal enables your cash runway extension?

Our forecast 18-month runway extension, now into 2028, is driven by the following: First, under the licensing agreement, PowerCo will invest the CapEx required for gigawatt-hour scale production facilities. The deal frees up to $134 million previously earmarked for our investment into the joint venture. Second, PowerCo will contribute resources and skilled personnel as part of the collaboration, which helps reduce our expected costs to industrialize our technology platform. Third, the licensing agreement features an inflow to QuantumScape, specifically a $130 million royalty prepayment contingent upon satisfactory technical progress. And separate from the PowerCo deal, we are continuing to make improvements to the efficiency of our operations, and these improvements are now incorporated into the forecast.

Okay. Thanks, Kevin. Siva, turning back to you and summarizing a couple of incoming questions we've received. Can you tell investors anything more about the joint collaboration team and the milestones that are part of this agreement?

John, now that we have signed this agreement, work begins immediately. We are planning to ramp the joint scale-up team to around 150 experts. The initial team will begin the collaboration activities here in San Jose. As the technology transfer proceeds, we expect it to move to a PowerCo facility with more of the resources coming from them as manufacturing ramps up. The project plan will address all the verticals of manufacturing, process, equipment, infrastructure, and continuous improvement. In terms of milestones, these are related to QSE-5 B-samples, the Cobra process, and finalizing the target design for the cell. We will then grant the license and receive the royalty prepayment.

Okay. Great. And my final question on the collaboration of licensing agreement. What does it mean from an intellectual property perspective?

Now, we believe we've built a strong IP portfolio in the next-generation battery industry. We've always been incredibly careful about protecting our IP, and we'll continue to push the envelope on innovation to create more value for shareholders and customers. We have and will continue to protect all IP relating to the separator in its manufacturing, including the Cobra process. QuantumScape and PowerCo will jointly own new IP we create relating to automotive battery cells and their industrialization. QS will remain an innovation-focused company, and we will continue to develop new intellectual property and technical know-how. For more information on the IP licensing, please do refer to our SEC filings.

Okay. Thanks so much, Kevin and Siva. We're now ready to begin the live portion of today's call. Operator, please open up the line for questions.

Thank you. The floor is now open for questions. Your first question comes from the line of Doug Dutton with Evercore. Doug, your line is now open.

Thank you. Hi, team. Congrats again on the nice deal with PowerCo. I just wanted to ask about what your timeline looks like with that partnership now consummated. So, does this make any change on the B-sample timing, on other commercialization timing, or was everything just the same sans the capital spending on gigafactories?

Thanks, Doug. To the first order, we have already told you what our big goals for this year are, getting Alpha-2 to customers, making sure low-volume B-sample production starts this year, ramping up Raptor and getting ready for Cobra. They don't change. For next year, getting ready for high-volume B-samples, that doesn't change either. So, in a big picture, this deal has been signed, and we will begin collaboration work immediately, but our goals and targets in the short term do not change.

Okay. Excellent. And then, I'll just ask one more here on if more of these deals are likely to follow as the new sort of modus operandi or the approach that you're going to take, or if you've opted for a more wait-and-see approach to understand how this first tie-up goes? It sounds like yes from your prepared remarks, but wanted to give you the opportunity to expand on that. Thanks, team.

Yeah. That's a very good question, Doug. We are a very highly differentiated technology that adds a lot of value to the customer. So, we expect to see a lot of interest in what we are offering. However, the model we are going with, which is a high-touch licensing model, requires that we be very strategic and prudent in our customers. So, there is going to be a level of careful inspection in matching our customers' needs and us. So, we're going to be very, very picky and careful in the way we get to the next deal.

Awesome. Thanks, everyone.

Your next question comes from the line of Joe Spak with UBS. Joe, your line is now open.

Hi. This is Gabriel on for Joe. Thank you for taking my questions. Kevin, just want to go back on monetization of the PowerCo agreement. I know you can't disclose the specifics, but can you kind of give us a sense of what you'll be charging PowerCo for? Like, is it a percent of the ASP or the COGS of the entire battery cell, or would you only be charging for the materials and costs specifically used for your ceramic separator process?

Gabriel, thank you for the question. I have empathy that these are important inputs into your modeling going into the future. I'd just point you back to the contract that we attached to our 8-K in Article 3 of the IP licensing agreement. It does have detail on the royalty rate and there's a section on outperformance sharing. Unfortunately, I won't be going beyond the detail of what we already provided in that contract on this call.

Understandable. Appreciate it.

Not providing very specific details in the contract is customary as it is in the best interest of both parties to avoid disadvantaging ourselves in further negotiations, especially for QuantumScape, as this deal could serve as a template for future licensing agreements. It's also in the interest of our shareholders.

No, that makes sense. I appreciate it. And just to clarify on the $130 million of prepaid royalties, do you get that immediately and now it's implemented into your cash runway forecast, or are you unable to access it until the technical requirements are met?

So, the $130 million initial prepayment of the royalty is contingent on satisfactory technical progress being made. Siva mentioned in his remarks it's things like those B-sample shipments, progress on Cobra, finalization of the final target cell design. To your question, it is an input into our cash runway that now extends into 2028.

So, it would be usable as of when you get it?

It would be usable as we get it for cash runway purposes. We, of course, reserve the right in our methodology to be as conservative as we can realistically be. We like to issue guidance and achieve it.

Great. Thanks. I'll pass it on.

Your next question comes from the line of Jordan Levy with Truist Securities. Jordan, your line is now open.

Good afternoon, everyone, and congratulations again on the deal. Perhaps you could clarify how the work with the joint team at PowerCo will differ from the ongoing projects with Raptor and Cobra. I’m curious about the distinction between the collaborative efforts and the current focus on manufacturing and commercialization.

Jordan, thank you. The basic work on QSE-5, that platform is done by us here. That's what the B-sample is, the small-volume production that is starting this year and the larger-volume B-sample that is starting next year. We need to take that and we will agree on a target design and industrialize it to gigawatt scale. That work will be jointly done by a group of experts, approximately 150 people initially that would start working in San Jose. And as that work matures and we begin to transfer to a PowerCo site, we will move from here into the PowerCo site and more and more and more people will join from PowerCo to ramp it up for production. So, the intent here is this word industrialization. The core technology to be made compatible with high-volume production in a gigawatt-scale factory.

Yeah. And, Jordan, if I could just put a little color around that. In Volkswagen Group and PowerCo, specifically, you have one of the most committed partners to electrification, a large balance sheet, strong leadership. Like what a more fantastic partner to combine with our differentiated solid-state lithium-metal technology and the benefits we'd like to bring to the cell and to the vehicle level in terms of energy density, power and safety.

Totally agree, and appreciate that. Maybe just a quick follow-up. In the prepared remarks, you all talked to on the safety metrics, the possibility to open up some new markets that the current technology is unable to serve effectively. I just wanted to see if there's anything specific you were referring to there, if there's anything of interest.

Before I go further, I want to emphasize that safety testing is an ongoing process. We will continue testing using prototype samples, and it is essential to do the same with the final product while gathering much more data. That said, our technology is inherently safer due to the ceramic separator and its solid-state nature. This provides advantages when designing a pack or module as it reduces the need for additional heat and thermal suppression precautions. For instance, consider a long-haul truck that carries over a megawatt hour of batteries. Ensuring that these trucks meet safety standards is currently a significant technical challenge that requires extensive safety precautions and engineering. Our technology makes addressing this challenge much more feasible. This presents a substantial opportunity, and we can already see the benefits of improved safety in existing applications like automotive and consumer electronics.

Absolutely. Appreciate that.

Your next question comes from the line of Jed Dorsheimer with William Blair. Jed, your line is now open.

Hi. This is Mark Shooter on for Jed. You did mention the consumer electronics in the opening remarks and the shareholder letter. I was wondering if you could explain or give any more color on that. Do you see that as a potential green shoot for revenue before an electric vehicle?

Mark, I believe you were referring to the Alpha-2 shipments, which were sent to several customers, including those in the automotive and consumer electronics sectors. A technology that offers benefits in safety, power, and energy density appeals to any application involving a battery. This is certainly true for both consumer products and automotive applications. We are primarily focused on the automotive sector, as evidenced by our significant partnership with VW and PowerCo. However, we are also receiving interest from other parties, and we continue to sample our products to them because it offers us more flexibility. At this time, I have no updates regarding the timing of revenue.

Thank you for the information. With the surge of AI applications being introduced for on-device use, I believe there will be a significant increase in battery demand from those customers. I'm looking forward to future updates. Additionally, while I know your focus is on electric vehicles, do you see potential in the eVTOL sector, which involves vertical take-off and landing vehicles? Are you in discussions with those customers?

Clearly, we are in conversations. eVTOLs uniquely have an additional requirement that they require a lot of power during take-off and landing, and they require a lot of energy for the range. The uniqueness of our differentiated technology is that we are good with both energy and power. Now having said that, our initial focus is, of course, in the automotive sector, and we have just entered this very big deal with PowerCo. We are watching all of these other additional opportunities very carefully.

I'd just add that aviation is certainly an application that greatly appreciates differentiated safety as well, which plays into the whole system design. And then, just as a passenger on airplanes from time to time, it is nice that they are robustly safe.

Got it. Thank you for the information.

Your next question comes from the line of Ben Kallo with Baird. Ben, your line is now open.

Good evening, everyone. Congratulations on the PowerCo deal. You mentioned trucks; have you tested any trucks yet, or are there plans or discussions regarding that? This is the first time I heard you mention trucks.

Ben, I'm illustrating the differentiated advantages of safety. We often take safety for granted, but for a cell to come back and say that we have thermal stability, checked up to 300 degrees Celsius, opens up a lot of new opportunities. Having said that, our focus clearly remains with EVs for now. We are working closely with PowerCo. PowerCo, serving Volkswagen, has a very, very broad brand portfolio that includes every segment of the mobility market. So, we are talking closely with PowerCo.

Great. For the remainder of your customers, do you feel this has influenced your discussions with them regarding their eagerness to move faster, or are they taking a wait-and-see approach? You mentioned this briefly earlier. Additionally, what about any new customers or potential OEMs that have been reaching out to you?

Ben, once we announce the deal, we individually updated every one of our customers, and there is a large and continued interest from our customers. We have also sampled and continuing to sample Alpha-2s to multiple automotive and consumer electronics OEMs, and we take their feedback into how we design and run the B-samples. The interest from our OEM partners has been very, very strong. Having said that, the PowerCo model is a high-touch, intellectual property-intensive transfer of our technology to a customer. So, we are very carefully evaluating every customer's needs so as we can develop a model specific to them with us having the preference of the capital-light approach.

Okay. Thank you very much.

That concludes our Q&A session. I will now turn the conference back over to QuantumScape team for closing remarks.

Thank you all for joining us today. We look forward to sharing more on our progress in the coming months. Thank you.

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