Earnings Call Transcript - QS Q1 2022

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 your conference.

John Saager, Head of Investor Relations

Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape’s First Quarter 2022 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 and 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 Form 10-K and other SEC filings, including uncertainties voted by the difficulty in predicting future outcomes. Joining us today will be QuantumScape’s Co-Founder, CEO and Chairman, Jagdeep Singh; and our CFO, Kevin Hettrich. Jagdeep will provide a strategic update on the business, and then Kevin will cover the financial results and our outlook in more detail. With that, I’d like to turn the call over to Jagdeep.

Jagdeep Singh, CEO

Thank you, John. At the end of 2020, we unveiled single-layer cell data showing a solid-state lithium metal chemistry, we believe is capable of delivering compelling performance benefit over conventional battery chemistries on key metrics such as energy density, range, and charging time. Since then, we have not only shown further advancement of this platform, including repeated 15-minute fast charge and operation with zero fly pressure, but have also demonstrated that we can scale up to multilayer cells using single-layer building blocks. We continued the steady progress into 2022 by showing our very first 16-layer cell on our February earnings call, and are pleased to note that we have now demonstrated results over 500 cycles with 16 layers under our gold-standard test conditions with energy retention and cycling behavior similar to our single 4-layer and 10-layer cells. In addition, one of our key goals for 2022 is to demonstrate our proprietary cell format, which is designed to be flexible enough to unlock the benefits of our anode-free cell architecture while accommodating the uniaxial volume expansion characteristic of lithium-metal anodes. This 16-layer result is in this proprietary cell format. We believe these results represent an encouraging proof-of-concept, and we look forward to sharing additional details on our proprietary cell format in the future. While we are pleased to share these results, we note that more work remains to be done on the quality and consistency of our materials and processes before we can achieve our goals of commercializing our technology. This requires a continued focus on improving our production tools and processes, as well as incorporating improvements in product design. We have encountered and expect to continue to encounter a range of technical, engineering, and production challenges as we execute on our plan. However, we believe successfully addressing these challenges will further strengthen the moat we have built around our technology with our IP portfolio, which now consists of over 300 patents and patent applications. In parallel to building up the layer counts of our cells, we have also been working to increase the scale of our operations. One key constraint on this front has been separator production, and a key goal for 2022 is to ramp up the production of separator films, with peak weekly starts of over 8,000. We are therefore happy to report that we recorded average weekly starts of over 3,700 exiting Q1 2022, compared to less than 2,000 exiting Q4 2021. This increase was made possible by new, higher-throughput continuous-flow separator production tooling on our Phase 1 engineering line. The new tooling has also increased our confidence in a core component of our scale-up thesis that larger-scale continuous-flow equipment can not only improve the throughput of our manufacturing process but also deliver improvements in quality and consistency, due to better process control. Increased throughput and better quality not only allows us to build more cells to test, but also allows us to allocate a significant fraction of our separator films to perform other critical tasks, such as automation testing and iterating on our manufacturing process. Over the coming quarters, we expect to take delivery and complete the qualification of many more large-scale and continuous-flow tools across our Phase 1 and Phase 2 engineering lines and our QS-0 pre-pilot lines. We continue to target delivery of A-sample cells to at least one customer in 2022. The A-sample is planned to have dozens of layers and is intended to demonstrate the core functionality of the battery cells. Automotive customers today are generally forced to make a choice between cells that offer higher energy, but lower power, or higher power, but lower energy. We believe that in order to substantially improve both power and energy simultaneously, new battery chemistries are required. The core value proposition of our solid-state lithium-metal technology is the potential to shift the performance frontier on both energy and charging speed simultaneously. In that vein, in Q1 we announced a new deal with a third Top 10 automotive OEM by global revenue. Upon achieving certain milestones, the deal reserves 5 megawatt hours of capacity for this OEM on QS-0, our pre-pilot production line. The agreement also provides a pathway to establishing a U.S.-based joint venture facility with up to 50 gigawatt hours in annual cell production capacity, subject to technical milestones and mutual agreements. This latest announcement is the fifth customer sampling agreement we've announced and affirms the strong interest leading automotive players have in adopting next-generation battery technology. Lastly, a word on our strategic vision. Battery development and manufacturing is a complex undertaking that requires grit, determination, and disciplined execution. Since entering the public markets in 2020, our team has been focused on laying the foundation for what we expect will be substantial growth in our manufacturing and operational capabilities. 2022 represents an inflection point in this process, and we believe we have shown that our long-term execution strategy is beginning to yield results. While substantial work remains to accomplish our 2022 goal, we believe this quarter’s increases in film starts, progress on our proprietary materials and cell format, and manufacturing quality improvements represent a strong start towards achieving these milestones. We look forward to reporting continued advances on these fronts in the coming quarters. With that, I'll turn it over to Kevin.

Kevin Hettrich, CFO

Thank you, Jagdeep. In the first quarter, our operating expenses were $91 million. Our GAAP net loss for the quarter was $90 million. This level of spend was in line with our expectations entering the quarter. Cash operating expenses defined as operating expenses less stock-based compensation and depreciation were $57 million for the quarter. For full-year 2022, we continue to expect cash operating expenses to be in the range of $225 million to $275 million as we focus on A sample prototype cell development and scale up of our engineering line. We’re turning towards the higher end of our cash OpEx guidance range as we are seeing signs of inflationary pressures, particularly on labor costs. CapEx in the first quarter was approximately $39 million within our guidance range of $30 million to $60 million. Approximately 60% of our Q1 CapEx went towards our Phase 2 engineering line. The remainder of Q1 CapEx was primarily dedicated to progress payments on QS-0 tools and initial facility spend on our QS Campus buildout. You can read about the details of our spend in the shareholder letter. We continue to expect total 2022 CapEx to be in the range of $325 million to $375 million and forecast second quarter CapEx to be in the range of $35 million to $65 million. For the remainder of 2022, we expect QS-0 equipment and the continued buildout of our expanded QS-0 campus to drive the majority of CapEx. We expect CapEx investment during 2022 to be more heavily weighted towards the back half of the year. We continue to target that by the end of 2022, our engineering line will have achieved its goal of producing A sample prototype cells and that we will have received most equipment for QS-0 towards our 2023 goal of producing candidate B-sample cells from that line. In line with previous guidance, we forecast OpEx to grow steadily during 2022 and 2023 OpEx to grow modestly from 2022 levels as we slow our headcount growth rate, reallocate resources from development to manufacturing, and realize gains from investments into automation. Payments in 2021 and 2022 continue to represent the substantial majority of investment into our engineering and QS-0 lines. Consequently, in 2023, we continue to forecast capital spending related to our engineering and QS-0 lines to decline significantly. With respect to cash, we spent $87 million on operations and CapEx in the first quarter. We continue to expect to enter 2023 with over $800 million in liquidity in line with previous guidance. We’re excited to be underway on our goals for 2022, including the production and delivery of A sample prototype cells and receiving most QS-0 equipment toward the production of B sample candidate cells next year. With that, I pass it over to you, John.

John Saager, Head of Investor Relations

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 comes from the Say app. Solid-state batteries have recently become an auto industry buzzword with nearly every automaker claiming there will be placing one in a vehicle in the near future. Can you speak to why QuantumScape will come out on top in this crowded house? What solid-state producers are the greatest threats to QuantumScape?

Jagdeep Singh, CEO

Sure, John. So first of all, we see the level of interest in solid-state batteries as evidence of the need for disruptive new chemistry to improve battery performance on the key metrics such as energy density or range and charging times. However, solid-state by itself doesn’t automatically mean better performance. The keys to show that your cells can deliver step-change improvement over lithium-ion batteries are metrics drivers care about such as the ones I just mentioned. The hard part is meeting all the key requirements simultaneously, what we refer to as the “and problem,” and the simple fact remains that we have yet to see anyone else, liquid or solid, of any size show data demonstrating cells that are capable of delivering step-change improvements to energy and power while also achieving 800 cycles on what we consider to be gold-standard testing conditions, including room temperature or 25 degrees Celsius, one hour of faster charging times and especially modest pressure. So having shown data demonstrating our technology can do this, we're now focused on scaling up along two axes: greater layer count and higher-scale manufacturing. Candidly, we believe that talking about scaling up before showing this basic capability is putting the cart before the horse.

John Saager, Head of Investor Relations

Okay. Great. Our second question is a short one. What is the current top priority for QuantumScape?

Jagdeep Singh, CEO

I would say there are three top priorities. First, we need to scale our multilayer cells up to higher layer counts. Second, we need to scale our production capabilities up to higher film and cell counts. Finally, we need to incorporate the new capabilities that we've already shown in single-layer cells that is repeated 15-minute charge into multilayer cells. Now achieving all these priorities requires continuing to deploy higher throughput and high-quality tools and processes, staying deeply engaged with our key customers, and continuing to recruit world-class team members. In fact, we have hundreds of positions open, and we welcome talented applicants. We’re interested in positively impacting the world.

John Saager, Head of Investor Relations

Okay. Our final question from the Say app, how do you plan on navigating the fact that lithium batteries are a finite resource and, with time, will become a more volatile good? Do you hope to create a 'less is more' model where you can get by on less actual lithium mass per battery?

Jagdeep Singh, CEO

I think it's important to note that unlike combustion engines in which gasoline is burned irreversibly and turned into CO2 and H2O, with lithium battery, the lithium is not consumed; it's simply shuttled back and forth between anode and cathode during charge and discharge. When the battery reaches end of life, that lithium is still there and can be recycled. Unlike many other lithium metal solutions, which require lithium foils or other forms of excess lithium on the anode, we have an anode-free design, which means we use zero excess lithium. The only lithium in the anode is the lithium that's cycling back and forth that we handle in the cathode. In addition, it turns out there's actually a lot of lithium in the Earth's crust. Our CTO, Tim Holme, once estimated there's enough lithium for 100 million cars per year for 1 billion years. While we're talking about 'less is more', our anode-free approach also uses zero carbon on the anode, so we eliminate the need for one of the most polluting steps of the battery supply chain. Overall, we believe this is fundamentally different from fossil fuel-based solutions. Of course, we, as an industry, need to continue to find the most sustainable ways to extract the lithium we do use.

John Saager, Head of Investor Relations

All right. Two more questions were received. Why the change in film size last quarter from 70 x 85 to 60 x 75? Does QuantumScape need smaller film sizes to accommodate an increasing number of layers or for some other performance requirements?

Jagdeep Singh, CEO

In the short run, our film size is driven by a balance between a number of key requirements: customer requirements, quality, throughput, and production equipment lead times. In the longer run, we can adjust our tool sizes, which enables us to make higher area films if that's what meets our customer needs.

John Saager, Head of Investor Relations

Okay, thanks. What remains to be done on the proprietary cell format before that goal for the year is considered accomplished?

Jagdeep Singh, CEO

It’s mainly just making enough of them to give us further confidence in the design. We'd like to see a lot of data, get a lot of statistics before checking the box on things like this. This also gives us an opportunity to iterate on the design, and of course, any new design does require multiple iterations to work out all the bugs.

John Saager, Head of Investor Relations

And our final question is for Kevin. Kevin, you've talked about commercialization in the 2024, 2025 timeline. Can you better define what you mean by commercialization?

Kevin Hettrich, CFO

Thank you for the question, John. Commercialization we define as the production of C sample cells made available for sale to a third-party, and we're currently targeting C sample production out of QS-0.

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 line for questions.

Operator, Operator

Thank you. The first question is from Gabe Daoud with Cowen. Your line is open.

Gabe Daoud, Analyst

Hey afternoon, guys. Thanks for all the prepared remarks and thanks for taking my questions. Kevin, I was hoping maybe we could just actually start with that last question from John, just on commercialization and how that's defined. So C samples by 2024, 2025, is that a little bit of a shift in timing from what you guys have previously noted? Or is that consistent with what you have been previously messaging?

Jagdeep Singh, CEO

We think it's pretty consistent with what we've said before. Gabe, this is Jagdeep, by the way, I jumped in here. I'll let Kevin jump in as well. We believe we can take QS-0 and actually get not just B samples out of there, but also C samples. C samples, of course, are defined as cells that not only meet the commercial requirement, but also are produced on the tooling that will be used for production. So if we can actually expand QS-0 to be able to produce cells for early commercial deployment, we will be able to do that. The other part of QS-0 is that it will be the testing ground for all of our detailed processes and tooling and really the blueprint for manufacturing. We really need to get QS-0 up and running because that will be the basis for expanding into higher-throughput manufacturing plants by mid-decade.

Gabe Daoud, Analyst

Got it. Thanks, Jagdeep. So maybe you hit on this a little bit again with one of the questions from John and also in the prepared remarks. But just this proprietary cell format – I also understand maybe not quite ready to share a ton of detail around it. But just curious if you could talk about how it has been performing relative to expectations and just accommodating volume expansion. And how does this proprietary format change, if at all, the packaging step of the manufacturing process?

Jagdeep Singh, CEO

Yes. So the new packaging is a pretty key part of our overall cell design. As you point out, when you have a lithium metal cell, especially an anode-free lithium metal cell, you have to be able to engineer a package that deals with that uniaxial expansion. The good news is the expansion is uniaxial, which means it only expands in one dimension; we can call it the Z dimension. It's easier to manage that than if we're expanding in three dimensions. For example, if you have things like silicon in the anode that expands in three dimensions, it’s harder to manage. We believe the design that we've implemented for managing that expansion has performed well. The cells that we reported that have achieved over 500 cycles were implemented in that design. We feel that design has demonstrated a certain level of capability, but it's not done yet. We need to do multiple iterations and work out what I call the bugs in the design as we iterate. We’re not ready to declare that we have checked the box in that. It's a goal for the year, but we feel encouraged that we've demonstrated that there's a basic level of performance within that package that can get through 100 cycles with that design.

Gabe Daoud, Analyst

Okay, got it. Thanks, Jagdeep. I’ll hop back in.

Jagdeep Singh, CEO

Sure, Gabe.

Operator, Operator

Thank you, Mr. Daoud. The next question is from the line of Srini Pajjuri with SMBC. Your line is open.

Srini Pajjuri, Analyst

Thank you, and congrats on the progress, guys. Jagdeep, just going back to the previous question. On the 16-layer, I think you said it's greater than 500 cycles is the performance. If you look at the history, you've been consistently at 800 cycles at four layers, ten layers, and one layer. So is there more room to improve here on the 16 layer? And when should we expect that to hit? If it's going to hit 800, when do you see that happening?

Jagdeep Singh, CEO

Yes. It's a good question. If you look back at our history, when we made first sales, we were happy to get any cycles at all. We kept improving design, we got hundreds of cycles, and then eventually, we got to fully mature designs that deliver on what we call the gold-standard testing conditions, which include hitting 800 cycles at room temperature, with one hour charge and discharge, power levels, and under modest pressure. These conditions have to be met simultaneously. What we reported is these cells, it's kind of a snapshot in time, over the 500 cycles. We hope to report additional data over the coming year with these and other cells that can get to our target of 800 cycles. Our goal for the year is to have A sample cells and A samples are going to be even more than 16 layers. We are currently targeting dozens of layers that we believe will be capable of achieving our gold-standard test conditions. It's an aggressive goal, and that's what we're targeting for this year.

Srini Pajjuri, Analyst

Okay. Thanks for that. And then one technology question. I think one of the benefits of solid-state – and especially your product that you're targeting – is fast charging in less than 15 minutes. Interestingly, if you look at some of the recent announcements, for example, Kia and Hyundai, they're talking about the new EV6, charging in 18 minutes from 20% to 80%. I mean, I don't have one. I haven't tested, so I don't know if – how legit those claims are. But just trying to understand, given that the traditional battery seems to be improving when it comes to fast charging, when you go into production, how much of an advantage do you think you'll have? And then less than 15 could mean less than – it could be 14% or even 10%. So where do you see that going longer-term in terms of fast charging for you?

Jagdeep Singh, CEO

This is a great question, and I'm glad you asked it. If you look at our shareholder letter, we actually have a graph that addresses this exact question. It's called shifting the power energy performance frontier. The key point is, you can make a battery today that can charge relatively quickly. The problem is if you do that, you must trade-off the energy density of the battery. You can take a conventional chemistry and either optimize it for energy, meaning high energy but lower power, or optimize it for power, meaning higher power but low energy. The first curve, the lower curve on that graph shows you what we believe today’s chemistries are capable of. There are two data points on that curve that are from actual vehicles on the market today. One is the top-selling long-range EV and the other is a leading high-performance EV. They have different operating points on the power-energy trade-off. So the real question to ask when you hear someone saying an 18-minute charge is, what type of cell were they using? The beauty of what we're doing is by changing the chemistry, you can push the whole power-energy frontier curve out and to the right. So if you look at the curve on the top, you see that you can have multiple operating points with the QuantumScape chemistry. You can make a QuantumScape energy cell or a QuantumScape power cell, but in both cases, you have higher energy and higher power than what’s available today. We believe what is achievable with conventional lithium-ion chemistry. It comes back to the “and problem.”

Kevin Hettrich, CFO

One minor point to add to that from a vehicle perspective: power, of course, is charge time, and energy is, of course, range.

Srini Pajjuri, Analyst

Thank you for your insights. I have one final long-term question, Jagdeep, I promise. You mentioned interest from a third top 10 customer, which could lead to a joint venture down the line with up to 50 gigawatts of capacity. Although I understand it's early in the process and many milestones need to be achieved before we reach that point, should we anticipate this happening within the next five years, or is it likely to extend beyond our five-year plan? Thank you.

Jagdeep Singh, CEO

It’s something that we will work on with these guys. As soon as we can achieve agreement and start deploying, we will start deploying. As we said earlier, the precursor to any larger factories is we have to get QS-0 finished and defined because that will produce the blueprint that we’re going to use for any factory expansion. Once we get QS-0 producing real cells, we should be able to jump to higher-capacity lines more efficiently about scaling up. I'm glad you pointed this particular JV out because there really is an opportunity here to build a compelling U.S.-based line with a really high level of capacity. Gigawatt hours is a big number; in fact, I believe that it is larger than the largest currently operating battery factory. It's a real opportunity.

Srini Pajjuri, Analyst

Got it. Thank you.

Jagdeep Singh, CEO

Absolutely.

Operator, Operator

Thank you, Mr. Pajjuri. The next question is from the line of George Gianarikas with Baird. Your line is open.

George Gianarikas, Analyst

Hi guys, good afternoon. Thanks for taking my question. First, maybe if you could talk about your long-term approach, given that you’re getting closer to building things around materials procurement and what sort of agreements you have out there, please?

Jagdeep Singh, CEO

Yes. I guess the good news is that we’re still not shipping product commercially, so the volumes that we consume in materials is relatively modest. We don’t have any immediate issues relative to material supply. That gives us time to work with some of the leading materials providers, and our procurement and supply chain teams are working with those suppliers to put in place agreements that we believe can address our needs. We also have this partnership with Volkswagen, one of the largest players in the automotive sector. We think that partnership could be helpful relative to securing attention from the suppliers as well. A lot of the suppliers we’re working with share our sentiment that the future of batteries and EVs is likely to be solid-state. They want to be a part of that future. People want to go where the puck is going, so to speak. We’ve seen a relatively warm reception from the suppliers we work with. We still need to get these agreements finalized and turn into contractual commitments, but so far, we feel like we’re engaged with the right players and putting in the right types of partnerships.

George Gianarikas, Analyst

Thanks. One more, just around software. Longer term, what kind of role do you see software analytics playing in the offering that you’ll give to OEMs? I'm not sure if you know that one of your competitors talks about a software package as an adjunct. I mean, is that something you’d consider as well?

Jagdeep Singh, CEO

Well, it depends on what kind of software you’re talking about. We do a lot of use of software and machine learning models on the manufacturing side. It can be effective relative to screening films and identifying whether parts you’re making are likely to be reliable or not. We have some strong partnerships with key suppliers there. In fact, deep learning model suppliers are playing an increasing role in our metrology and manufacturing processes. If you’re referring to players trying to use AI or machine learning models in production to detect dendrite formation, to be honest, our belief is that if your system is already experiencing dendrite formation, it’s too late. You cannot rely on predictive models to prevent it from failing. We’ve had a lot of experience with lithium metal and dendrites. If your material doesn’t prevent dendrites, they’re going to form. We don’t view this as a viable strategy. I don’t think any automaker will accept the risk of a battery that could dendrite during operation and rely on predictive models to prevent it. The key distinction is there’s substantial value in deploying software and machine learning models on the manufacturing side. However, there isn’t a viable way to use those models to prevent dendrite formation during operation.

George Gianarikas, Analyst

You guess correctly. Thanks, guys. I’ll go back in queue.

Operator, Operator

Thank you, Mr. Gianarikas. The next question is from the line of Wendy Dong with Deutsche Bank. Your line is open.

Wendy Dong, Analyst

Hi, thanks for taking my question. I was wondering if you can talk about the line of visibility you have to taking the large-scale equipment you’ve mentioned in the shareholder letter. Then maybe you can just walk us through how that would take you to 8,000 film starts by the end of the year? Would you say that you’re ahead of that goal so far since we’re at end of Q1 and you’re already almost halfway there? And I have a follow-up.

Kevin Hettrich, CFO

For the Phase 2 engineering line that's set to come up this year to produce the A sample candidate cells, we have excellent visibility as that tooling is primarily on order at this point. I would say we have good visibility into QS-0. We've set a goal to land the majority of the equipment this year for the startup of that line next year, producing B sample candidate cells. So that was the visibility part of the question. Wendy, can you remind me if there was a second part?

Wendy Dong, Analyst

Yes…

Jagdeep Singh, CEO

It has to do with the film starts. Yes, on the film starts, we’re pleased with the 3,700 starts weekly average that we reported. We’ve been film constrained for quite some time now. We’ve known for over a year that we need to make more films because everything depends on our film quantities, not only making new cells to test and deliver to customers but also qualifying new process equipment. When we make a new tool with higher automation, our tool vendor needs films from us to develop and validate those tools. The demand for films is insatiable for various development and manufacturing activities. Increasing capacity tends to be relatively nonlinear, more like a step-function increase. The fact that we’ve gone from less than 2,000 films in Q4 to about 3,700 in Q1 is a great sign that those new tools are operational. One of the key parts of our thesis has been that when we deploy those larger continuous-flow tools, we not only gain more throughput but also higher quality. That's exactly what's born out. If you look at some of the key metrics we use for quality on the films, we're seeing better performance on those metrics out of these new, larger continuous-flow tools that we have with the separator. The goal for the end of the year was 8,000 films. We believe we're tracking to that goal, and if we can get there, we should be in good shape relative to the rest of our goals this year, including the A-sample.

Wendy Dong, Analyst

Thanks for that. Another one from me. I guess what's after 16-layers? Is there more ground you have to cover before you jump to “several dozen layers,” for instance, 24 or 26, before you jump to several dozen things?

Jagdeep Singh, CEO

I mean, obviously, our development teams are going to be assembling cells to a higher layer count. Dozens of layers is the most meaningful milestone because that's the point at which we believe doubts about the scalability of the technology will be addressed. We’ve shown significant progress from one-layer to four-layers to 16-layers. The most important aspect of these layers is that the cycling performance and capacity retention is similar. Performance on the one, four, ten, and 16 layer cells is very similar. This is important because when we first announced our results back in 2020, some questions arose about what happens when making multi-layer cells. We're committed to try and achieve A-sample this year.

Wendy Dong, Analyst

Thanks for taking my question.

Jagdeep Singh, CEO

Absolutely.

Operator, Operator

Thank you, Ms. Dong. The next question is from Chris Snyder with UBS, your line is open.

Chris Snyder, Analyst

Thank you. I wanted to follow up on those comments just made around the scaling up of the multilayer cell design. So it seems like the company has been adding about six layers at a time, at least based on the test results in the shareholder letters that we've gotten. How does the company think about the magnitude of these increases? I assume the absolute level will increase; is the percentage increase a better way to think of that? A year ago, the company was doing four layers, now we're doing 16 layers. Just trying to get some color around how the company thinks about that ramp, as you work to deliver the A sample with dozens of layers by year-end?

Jagdeep Singh, CEO

The way we think about it is that we make building blocks of unit cells, and then we assemble the building blocks into bigger building blocks. It's not like we add one layer at a time. There’s sort of more of a percentage effect rather than a linear effect. If you look at the slide on page 2, it shows a graphic of time on one axis and number of layers on another, and you see almost an exponential-looking curve. If you look at the time it took us to go from one-layer to four-layers, and then four to 16, you're seeing relatively rapid progress. One of the main constraints we’ve had is simply getting enough films. The fact that we now have the film starts increased to 3,700 last quarter was key. For each cell, you need 16 films; that's 16 times the capacity when making single-layer cells. Our goal is to have several dozen layers this year. Again, it’s an aggressive goal, and we'll see if we can hit it. If we do, it'll be quite transformational.

Chris Snyder, Analyst

I appreciate that. Really helpful. Then for my second question, I wanted to talk about the scaling up of the separator film production and the charts on Page 4 of the shareholder letter. Just to ensure I'm understanding them correctly, when you say that you're averaging 3,700 weekly starts to exit Q1, does that translate to roughly producing 3,700 separators? And of that production, does a bit over 1% of the output meet the company's assessment of good quality films, which is pretty significant from the old process?

Jagdeep Singh, CEO

The line is actually 100%. The vertical black line in the top represents 100%. What these quality metrics are showing is that we wanted to share because they make an important point. On the X-axis is a couple of different proprietary quality metrics we have that we use to determine whether the films are good or bad. The vertical green bar shows you the reference level of performance or quality we’re looking for. If the quality metric is to the left of that line, it's a good film. The quality metric to the right is a bad film. The red curve shows that the previous process produced films that were good maybe 30%-40% of the time, and with the blue lines from the new process, we’re seeing well over 90% or nearly 100% meet our performance threshold. This improvement in quality means we can use these films for various functions like building cells to test and deliver to customers. We’re seeing much higher quality films with this approach.

Chris Snyder, Analyst

Thank you for all that color and I appreciate you clarifying on the access. So thank you for that.

Jagdeep Singh, CEO

Absolutely.

Operator, Operator

Thank you, Mr. Snyder. The next question is from David Bell with Wolfe Research. Your line is open.

David Bell, Analyst

Hey guys. Congrats on the quarter. Thanks for taking my question. I wanted to follow up on the last point a little bit. Could you just clarify what has been the assessment from your team as to why these improvements are happening when you go to larger scale tooling and more continuous throughput?

Jagdeep Singh, CEO

The short answer is process control. The larger tools come with better process control. For example, these tools have different zones as the films are processed. Each zone applies a different profile, so having better isolation prevents spillover of conditions into adjacent zones, allowing for better control on the films, resulting in higher quality. Better quality leads to everything we do. This has been a key part of our scale-up thesis: higher throughput should yield better quality because of that increased automation. We’re pleased to see the actual quality of the films improve in this manner.

David Bell, Analyst

Thanks, Jagdeep. Just shifting directions quickly to chemistry, can you comment on how your conversations with the auto OEMs have evolved over the last quarter, as issues with nickel have come up? Are they looking to change direction to leverage your battery technology?

Jagdeep Singh, CEO

One is that our system is cathode agnostic, which means that we don’t tie the automaker to nickel. If they choose, they can use a lithium-ion phosphate system. We’ve shown our system works with lithium-ion phosphate. In our system, because we don’t have an anode, we avoid anode materials and processing costs. The design becomes cost-effective; if the spot price of nickel goes up, the overall system with anode-free design costs less than one requiring carbon, silicon, or lithium metal. Also, the separator uses established supply chains for precursors. In summary, we feel our system has some fundamental advantages regarding raw material requirements, specifically being anode-less and having a cathode agnostic design and global commodities for the separator. If you’re operating in this supply crunch mode, our architecture is probably better suited than conventional architectures.

David Bell, Analyst

Thanks, Jagdeep. Just one more quick one for me. Could you give me a sense of how many pre-A sample cells you’ve delivered to OEMs and what size the 16-layer cells are? Are other OEMs largely reporting similar data that we’re seeing today?

Jagdeep Singh, CEO

I don’t have the exact numbers, so I can’t give you specifics. The shareholder letter indicates we've shipped multiple generations of cells to multiple customers across various applications. In Q1, our 10-layer cells were successfully tested by one automotive customer and entered the testing phase with another cell. Our processes are developed in-house; we must work through all the iterations for reliability before providing cells to customers. One thing to add about the previous question is that while we may have advantages concerning supply chain relative to anode necessity, we still require lithium; our system uses lithium metal. We also don’t need lithium foil like some other lithium-metal approaches. Overall, we believe having an anode-less design, being cathode agnostic, and using global commodity resources positions us well in today’s supply crunch.

David Bell, Analyst

Thanks, Jagdeep. Thanks for taking my questions.

Jagdeep Singh, CEO

Absolutely.

Operator, Operator

Thank you, Mr. Bell. There are no additional questions waiting at this time. I’ll now turn the conference over to Mr. Singh for any closing remarks.

Jagdeep Singh, CEO

On a personal note, I’d like to say that with the exception of satisfying tax obligations and covering expenses related to the acquisition of QuantumScape stocks through the exercise of options, I hold. I’m committed not to sell QuantumScape shares until we deliver a prototype cell to an automotive customer. Thank you for joining, and I look forward to seeing everyone again next quarter.

Operator, Operator

That concludes the QuantumScape Q1 2022 earnings call. Thank you for your participation. You may now disconnect your lines.