Earnings Call Transcript - QS Q2 2021

Operator, Operator

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

John Saager, Head of Investor Relations

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.

Jagdeep Singh, CEO

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 roadmap. 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 an 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 Hettrich, CFO

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. For 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 Saager, Head of Investor Relations

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?

Jagdeep Singh, CEO

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 in our lithium-ion factory and get commensurate cost savings if we were to go to that route.

John Saager, Head of Investor Relations

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

Jagdeep Singh, CEO

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.

John Saager, Head of Investor Relations

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-thirds 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?

Kevin Hettrich, CFO

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 his prior holdings; as of June 30, 2021, Mohit Singh, our Chief Development Officer, holds 86%; and Mike McCarthy, our Chief Legal Officer holds 83%.

Jagdeep Singh, CEO

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.

John Saager, Head of Investor Relations

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?

Jagdeep Singh, CEO

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 has 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 battery supplier decisions to be proprietary. So with respect for them, we usually let them be the ones that announce their partnerships.

John Saager, Head of Investor Relations

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?

Jagdeep Singh, CEO

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 of 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 energy density than lithium-ion batteries because of the elimination of the carbon or silicon anode. 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 silicon anode is, in fact, a key limiting factor for all those parameters.

John Saager, Head of Investor Relations

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

Jagdeep Singh, CEO

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, will be 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 layer counts.

John Saager, Head of Investor Relations

Okay. Our last question from the Say app. Do you plan to test your battery from a third party to prove all the claims in your reports are true?

Jagdeep Singh, CEO

So, as we've said before, we believe the best independent testing is testing conducted by our prospective customers. And of course, we had multiple customers test our cells 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 for independent testing, and we'll share results as we have them. I want to point out, though, that we don't intend to do this for every generation of cells as our focus remains on providing cells to our customers.

John Saager, Head of Investor Relations

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, Operator

Your first question is from Rod Lache from Wolfe Research. Your line is open.

Rod Lache, Analyst

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?

Jagdeep Singh, CEO

Sure. Regarding the question about manufacturing improvement, at the core is better uniformity, quality, and consistency of the films. These factors are critical for enhancing performance across all important metrics, including cycle behavior and low temperature. Improvements in manufacturing processes have enabled us to produce better films, which leads to higher yields, meaning more of the films we start with are usable. This is crucial since a 10-layer cell requires ten times as many films. Having a higher quantity of good films helps us manage this demand. Additionally, when stacking multiple films, nonuniformity can compound issues; hence, better quality is essential for successfully achieving 10-layer cells. I believe you also inquired about our scale-up plans, correct?

Rod Lache, Analyst

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

Jagdeep Singh, CEO

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.

Rod Lache, Analyst

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?

Jagdeep Singh, CEO

I believe we haven't provided detailed guidance on our cost structure, but I can share some insights. There are two key aspects of cost that may be useful for your models. Firstly, as you mentioned, on the anode side, we think there is no solution cheaper than an anode-less lithium metal design since it has no associated cost. This, combined with an LFP cathode, yields additional benefits due to the relatively low cost of the cathode's active material. As you know, spot prices for regular NMC cathode material have varied, with recent prices around the low $20s per kilogram. In contrast, the price for LFP cathodes might be in the low single digits per kilogram, highlighting a substantial cost difference. With the anode cost eliminated due to the anode-less design, the cathode becomes a more significant factor in the overall cost, making a lower-cost cathode advantageous. To summarize, we believe the cost advantage outlined in our initial model of having a 15% to 20% lower cost compared to conventional lithium-ion cells holds true even for the LFP cells. The combination of a lithium metal anode-less design with LFP provides two significant benefits. Firstly, it results in the lowest-cost possible design by using a zero-cost anode alongside very inexpensive cathodes, leading to a cost-advantaged cell. Secondly, it addresses the primary drawback of LFP, which is its energy density, by combining it with the appropriate metal, enhancing its energy density to levels comparable to today's conventional NMC-based batteries. This demonstration aims to inform the market that we are neutral regarding cathode choices; we can collaborate with any cathode our OEM partners prefer. There isn't a competition between LFP and lithium metal anodes; rather, they represent different dimensions of the cell design space. We can progress on both fronts simultaneously. Thus, if LFP becomes essential for a specific segment of the automotive market, we believe that a lithium metal anode teamed with LFP will provide the best possible LFP solution, which is very promising.

Rod Lache, Analyst

Great. Thank you.

Jagdeep Singh, CEO

Absolutely.

Operator, Operator

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

José Asumendi, Analyst

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 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.

Jagdeep Singh, CEO

Yes, thank you for the question. This is Jagdeep. I'll start with the last question because it’s a straightforward topic, and then I’ll pass it over to Kevin for the first two. We are very pleased to have Celina join us. She has a strong background, having led a manufacturing engineering group at Panasonic's Gigafactory in Reno, which is considered one of the largest battery facilities globally. Beyond her manufacturing expertise, she also has significant experience in battery technology, having previously worked at what is now known as Exponent, where she contributed to battery safety analysis. At Tesla, she helped introduce many of the well-known models, and later worked at Uber. Celina brings an exceptional combination of battery knowledge and the operational skills needed to run a high-volume battery line, where producing millions of cells requires addressing numerous detailed factors, such as ensuring that the blades used for cutting films are properly sharpened and that the supply chain is well-managed. These concerns are not as prevalent in small-scale manufacturing, and her experience with one of the highest-volume battery production lines is invaluable. Coupled with Clayton Patch, who runs our actual production line and has a semiconductor background, we have a strong team. Clayton's expertise in metrology and data collection during material processing is crucial as we scale up our operations, especially with our separator line and the ceramic line. We can apply techniques from semiconductors to maintain tight control over our processes. These hires exemplify our commitment to enhancing our execution as we progress. Now, I’ll hand it over to Kevin to address your first two questions.

Kevin Hettrich, CFO

José, thank you for the question. The 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 a headcount 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 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.

Operator, Operator

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

Adam Jonas, Analyst

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?

Jagdeep Singh, CEO

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 that available 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.

Adam Jonas, Analyst

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.

Jagdeep Singh, CEO

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 have 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 ESG profile if cobalt is mined in certain places that are not the best working conditions. 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 avoid nickel entirely. And then having an iron-based cell, iron is obviously a super abundant material, super low-cost. And that's what allows LFP to be in those mid-single-digit dollar per kilo band. But the most important takeaway, Adam, is that it's a cathode-agnostic design, right? The fundamental brief that we have is a solid-state separator 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.

Adam Jonas, Analyst

Okay. Just one final question from me. Jagdeep, you mentioned in one of the prepared questions that you will submit yourselves for independent testing and will provide the results at a later date. Can you share which testing body will be involved and when we might expect to see those results? I understand this won't be for every iteration, but it does seem like this would carry a lot of significance, and the fact that you are considering it implies you believe it holds some importance as well.

Jagdeep Singh, CEO

Yes, we are using a certified battery testing laboratory and have already submitted our cells for evaluation. Testing requires time, and even at a 1C rate, it can take several months to complete a few hundred cycles. Once we have the results, we will certainly share them. While we believe that the testing conducted by customers in their own labs is what truly matters, some investors feel more assured when a third-party lab performs the tests, which is why we are pursuing this. We will publish those results, and I appreciate your understanding that we don’t plan to do this for every generation of cell. However, having some basic validation could provide value.

Adam Jonas, Analyst

And these are four-layer cells or one layer?

Jagdeep Singh, CEO

These will be single-layer cells designed to validate the core capabilities under what we refer to as uncompromised test conditions. We will assess their performance at standard temperatures and pressures, while examining high rates of charge and discharge, such as 1C1. We plan to share all the data along with our findings in the future. We didn't want to discuss this too much prematurely since we don't have the results yet.

Operator, Operator

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

Gabe Daoud, Analyst

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?

Jagdeep Singh, CEO

Yes. So I mean, I think our target remains end of the year. And I think the main point we 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-year goal. There is work to be done. And primarily, that work involves making many 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 those are the kind of things we expect to do but we now have end of the year to basically turn those cells into what we call baseline cells. Also in the letter, we mentioned this learn-fast kind of 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.

Gabe Daoud, Analyst

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 separator? Just trying to get a sense of it was really more of a pull kind of request, I guess.

Jagdeep Singh, CEO

Yes, I understand your question. We do not discuss any customer specifics that aren't finalized or announced, so I cannot address that directly. However, the general idea is that there is a role for a low-cost cathode in the automotive market. We have been focused on NMC 811 because it showcases the energy density and fast drive benefits we have mentioned. It's important to clarify that our lithium metal analysis line is not tied to any specific cathode. Given the renewed interest in LFP, we believe we have something valuable to contribute. LFP has several advantages over higher energy cathodes, such as lower cost, better thermal stability, improved recycling performance, and potentially higher power density depending on cell design. However, its significant disadvantage is low energy density, which limits its applicability in many situations. The purpose of our demonstration was to show that you can take this low-cost chemistry and combine it with an anode-free design to address the major limitation of energy density. The aim is to create a low-cost design that competes with current NMC time chemistries, which many OEMs would find appealing. That is the reason for the demonstration.

Operator, Operator

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

Ben Kallo, Analyst

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?

Jagdeep Singh, CEO

Yes, it has always been a cathode design. We didn't want people to associate QuantumScape solely with NMC because our unique innovation is the lithium metal anode-less design, which is made possible by the solid-state separator. As you rightly noted, we are agnostic to cathodes. However, we have actual data showing cells built with LFP cathodes and our lithium anodes, which reinforces that point because both are intriguing cathode materials and will play important roles in the coming years.

Ben Kallo, Analyst

On the headcount increase and congratulations. Could you just talk about recruiting in this type of environment with battery capacity across the board being expanded?

Jagdeep Singh, CEO

We've been fortunate with our recruiting efforts, experiencing a 20% growth in the quarter alone, which indicates strong momentum. During the pandemic last year, we hired extensively and have seen many exceptional candidates. This has allowed us to maintain a high quality of employees. I believe that for engineers or scientists focused on next-generation batteries, QuantumScape is an unmatched opportunity. We're not just making incremental advancements; we're involved in disruptive innovation. Our published data demonstrates our core capabilities, and our well-resourced lab, equipped for battery manufacturing, testing, characterization, and metrology, provides tools that many organizations lack. This fully equipped lab enables us to attract outstanding talent. The recent hires, such as Celina and Clayton on the manufacturing side, showcase our strategy, but they represent just the beginning of our expanded team. We've added many talented individuals over the last year, which has been crucial for maintaining our forward momentum.

Ben Kallo, Analyst

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?

Jagdeep Singh, CEO

Yes. Here's our perspective. If you're an OEM looking for a next-generation solution through chemistry, there are a few alternatives to what QuantumScape is doing. For instance, other solid-state approaches include sulfide and polymers. However, these methods have not demonstrated the ability to prevent dendrite formation under the uncompromised conditions we frequently discuss, such as one hour of charge and discharge at temperatures between 25 to 30 degrees Celsius and pressures of three to four atmospheres. Previous attempts at solid-state solutions using different materials have failed to cycle under these conditions. If someone has developed a method that can, that would be noteworthy, but we haven't observed it yet. Additionally, some are utilizing liquids with lithium metal, which can yield results at low power rates; however, dendrite growth increases exponentially with higher power, along with the chemical side reactions that lead to resistance growth. We believe these liquid-based approaches won’t be suitable for high-power applications like automotive, although they might find use in low-power scenarios. Finally, there's silicon, which can incrementally enhance the density of lithium-ion cells. Even in a scenario with a 100% silicon anode, the mass would double because of the atomic weights of silicon and lithium. Ultimately, if we have a functioning lithium metal and anode-less design, we see little utility in other methods. Our main challenge is not about finding a superior solution but rather about effectively executing our vision and achieving commercial production. We're focused on that and believe the product updates we've shared on this call are promising indicators of our team's progress. While we are not claiming to be shipping yet, we view this as a sign of the team's effective execution, with potential to transform the sector if it continues.

Operator, Operator

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

Mark Delaney, Analyst

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 is, relative to what you think you may use in volume production for separator manufacturing?

Jagdeep Singh, CEO

Yes, let me address two different parts. We keep the details of the separator process confidential because it's one of our most valuable assets. The improvements we've made aim to create high-quality films, specifically focusing on uniformity. There are various types of non-uniformities that can impact the performance of the separator. The broader industry working on these materials doesn't fully appreciate the significance of these variations, which can include compositional, morphological, and deep activity non-uniformities. These factors influence the performance of our separator ceramic. The changes we've implemented in our process have led to significantly improved quality and consistency. It's essential not just to produce high-quality films but also to do so reliably to achieve better yields. Regarding the tools we are using, the images in the shareholder letter depict a continuous flow heat treatment tool. Every ceramic goes through a heat treatment step, but many current processes are batch-oriented, which we believe lack scalability. Our continuous flow process runs separators through a conveyor belt heat treatment tool with different zones that can apply distinct heat treatment profiles as the film progresses. This approach enables us to scale effectively without relying on batch tools. To summarize, the key points are that our improvements result in better quality films with improved consistency, and our continuous flow treatment tools will allow us to increase throughput and enhance quality due to their precision in applying heat treatment profiles.

Mark Delaney, Analyst

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?

Operator, Operator

Excuse me, this is the operator. I apologize, but there will be a brief silence as the speakers' line got disconnected. We will resume shortly. One moment, please.

John Saager, Head of Investor Relations

Okay. Thank you, Operator.

Operator, Operator

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

Jagdeep Singh, CEO

So I apologize for that; the line got dropped. Can everybody hear me back on? So I assume we're back on, right?

Mark Delaney, Analyst

Yes, I can hear you. Thank you.

Jagdeep Singh, CEO

So Mark, I don't know if you're still on, but did you hear the answer to your question?

Mark Delaney, Analyst

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

Jagdeep Singh, CEO

Yes, I apologize for the interruption. It seems that everyone has lost connection. I have reconnected. Additionally, I wanted to mention that the team has received an update on the LFP chemistries, and Kevin can provide that information quickly.

Kevin Hettrich, CFO

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 kilogram.

Operator, Operator

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

P.J. Juvekar, Analyst

You say that you're cathode agnostic, whether it's LFP or NMC, et cetera. Now each of those cathodes has 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?

Jagdeep Singh, CEO

Yes. The advantage of our approach is that the lithium used in our anode is the same lithium that cycles in a typical lithium-ion battery. The distinction is that instead of the lithium intercalating into a carbon or silicon particle, it forms a layer of pure metallic lithium. Regardless of the lithium content in the cathode—whether it's LFP or NMC—lithium ions will flow out of the cathode and reach the anode. The key difference lies in what occurs when the lithium arrives at the anode: it creates a layer of pure metallic lithium as opposed to being held in place by the graphite in a typical lithium-ion setup. In this conventional system, the lithium ions are fixed in an ionic state and held by six carbon atoms. However, by eliminating carbon and silicon, the lithium ions can bond with each other, resulting in lithium-metal. Therefore, it operates independently of the cathode type, and the same lithium that would typically go into the anode instead forms the metallic lithium layer.

P.J. Juvekar, Analyst

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?

Jagdeep Singh, CEO

I think it's important to realize that there is a general market for transportation based on the annual number of vehicles sold, and this market includes a diverse range of vehicles with varying needs. By incorporating LFP as a cathode, we can cater to a wider array of that market. Consequently, there are fewer vehicle applications where our anode technology would not be suitable. It's possible to say that, without LFP, some low-cost applications focus solely on price, even if their energy density isn't competitive. However, with our LFP solution, we can meet the needs of those low-cost applications while also enhancing their range and performance with the LFP battery.

P.J. Juvekar, Analyst

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.

Jagdeep Singh, CEO

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 liter. 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 both the LFP with lithium metal and then the 10-layer cell together, I think, are very encouraging in terms of our ability to serve the full market.

Operator, Operator

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

Jagdeep Singh, CEO

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.

Operator, Operator

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