Earnings Call Transcript - QS Q4 2020

Operator, Operator

Good day and welcome to QuantumScape's Fourth Quarter 2020 Earnings Conference Call. My name is Sheryl, and I'll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. 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 fourth quarter 2020 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 our Safe Harbor provision for forward-looking statements that is posted on our website and as part of our quarterly update. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statement for the reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed 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 Singh.

Jagdeep Singh, CEO

Thanks, John. Welcome to our first earnings call as a public company. Earlier today, we published a letter to our shareholders summarizing the major developments from the last quarter and fiscal year. If you haven't already read it, we encourage you to take a look as our shareholder letter will be the primary way we report our progress to you. In addition to the SEC website, you can also find it on our company Investor Relations website, ir.quantumscape.com. I won't repeat all of the contents of the letter here, but I would like to call your attention to a couple of key highlights. First, for those that are new to the QuantumScape story, some brief background. We were founded in 2010 out of Stanford with the mission to revolutionize energy storage and enable a sustainable future. The first application we focused on is the transformation of the automotive powertrain to an electrified version, which we believe represents both a very important part of the solution to the emissions problem as well as an opportunity to create tremendous value over the coming decades. Over time, we expect to push into other markets, including stationary storage for the power grid and consumer electronics. We are a pioneer in the development of a new type of battery, the solid-state lithium-metal battery. Our technology replaces the polymer separator used in conventional batteries with a solid-state ceramic separator, enabling us to replace the carbon or silicon anode used in these conventional cells with an anode of pure metallic lithium, which in turn allows us to make batteries with higher energy density, greater driving range on a single charge, faster charge times, and improved safety while offering long cycle life. We believe these are some of the fundamental issues holding back widespread adoption of battery electric vehicles. The beauty of our approach is we delivered these benefits, not by increasing the complexity of the battery, but by simplifying it, eliminating the anode layer of conventional cells. As a result, less than conventional batteries, last December, our batteries should clear the benefits of this lithium-metal approach versus the traditional lithium-ion approach. In particular, we showed data showing the cells were capable of achieving long cycle life now with over 1,000 cycles to like 90% of the initial capacity, while operating at near room temperatures of 30 degrees Celsius and high current densities or rates of power of 1C. In addition, we shared data showing these cells were capable of fast charge rates of 15 minutes to 80% state of charge, excellent performance relative to conventional cells on the most demanding drive cycle such as those found on racetracks and operation at low temperatures including cycling data at negative 10 degrees Celsius. We believe this data marks a new high watermark for the solid-state battery industry and are unaware of any alternative solid-state approach with better performance results. I think demonstrated this level of performance on our single battery cells, our goal for the coming year is to stack these layers up and make multi-layer cells, forming the basis for our commercial target cells. We are therefore very pleased to report for the first time that we have assembled four layer cells in the 30 by 30 millimeter form factor. And these cells have reached close to 800 cycles to over 90% capacity retention at both 1C and C/3 rates at 30 degrees Celsius, substantially similar to the cycling performance we showed in our single layer cell and demonstrating it is possible to stack our single layer cells without adversely impacting cycle life and capacity retention of the cells. We used 30 by 30 millimeter cells, made from separators cut from our standard target commercial area separators, because it allowed us to effectively quadruple our current outlook as we work to scale up our engineering line capacity. While there is still a lot of work to be done and we could encounter new challenges as we increase our layer count, this is an incredibly important result, and we are excited to have this so early in the year. We now need to make these multi-layer cells using our commercial area 70 by 85 millimeter layers, increase the number of layers, aiming first for four layers and subsequently for eight to 10 layers by year-end, optimize the manufacturing processes, and address any new challenges we find. We believe that if we achieve these milestones, we will be on track to achieve our goal of delivering prototype battery cells to our customers in 2022. The other thing I'd like to draw your attention to is based on this recent progress and to help with further scale-up, we have decided to build our own pre-pilot line facility in San Jose, which we call QS-0. QS-0 is intended to have a continuous flow, high automation line capable of building over 100,000 engineering cell samples per year, and we expect to be producing cells on this line by 2023. QS-0 will help provide the additional capacity we need for our development work and will enable us to accelerate work on the next generation of manufacturing tools. It will also provide capacity to make enough batteries for hundreds of long-range battery electric test vehicles per year. This will allow us to provide early cells to VW, as well as other automotive partners, explore non-automotive applications, and help de-risk subsequent commercial scale-up. With that, I'll hand it over to our CFO, Kevin Hettrich, to say a few words about our financial performance, and then open it up to Q&A.

Kevin Hettrich, CFO

Thanks, Jagdeep. Before I give perspective on our financial outlook for 2021, I would like to first give a little color on our fourth quarter and full year 2020 result. In the fourth quarter, our operating expenses were $30 million. Excluding stock-based compensation, operating expenses were $22 million. In accordance with U.S. GAAP, we were required to take a non-cash expense of $665 million relating to warrants and Series F preferred stock issued prior to the business combination, bringing our GAAP net loss in the fourth quarter to $695 million. These preferred warrants and Series F preferred stock originally classified as liabilities in accordance with U.S. GAAP, were subject to non-cash fair value measurement at issuance entities reporting period. The final re-measurements were done at the close of the business combination. As a result, there will be no further re-measurements related to these. On a full-year basis, our operating expenses were $81 million or $64 million excluding stock-based compensation. Our GAAP net loss for fiscal year 2020 was $1.1 billion. Fair value adjustment of the preferred stock previously referenced. The nearest 0.1 million shares, we ended 2020 with approximately 364.0 million shares of common stock outstanding. As of December 31, 2020, the company had a total of approximately $466.6 million issued and issuable shares, including those issuable upon the exercise of warrants, shares issuable upon VW's second tranche investment, and shares issuable to employees and consultants upon the exercise of outstanding options or vesting of RSUs. Note that all the aforementioned shares, warrants, options, and RSUs have been registered on the company's S4, S1, and S8 filings. With respect to cash, we used $37 million of free cash flow in the fourth quarter and $85 million for the full year 2020. We anticipate free cash flow burn to be in the range of $230 million to $290 million for 2021, of which approximately 40% to 50% of CapEx, including investments in QS-0. These investments will support our multi-layer work, advanced production process maturity, notably to make our solid-state separator films and for cell assembly, and support customer engagement. We expect to use less than $60 million of net cash in 2021, assuming receipt of proceeds from VW financing and assuming exercise of the public warrants. This would allow us to enter 2022 with a liquidity position of over $900 million sufficient funding, we believe, to fund us through production. Of course, the pace with which we are able to spend will depend on several factors including the ability to ramp headcount and the maturity of our production processes including the level of its automation. With nearly $1 billion on the books as of Q4 2020, the strength of our balance sheet we believe will give us the flexibility we need to execute on our plan through commercialization. In summary, we're excited with where we are and look forward to the challenge ahead. We'd like to thank our investors for their support and belief in our mission to help usher in the battery and electric vehicle revolution. With that, I'll pass it back over to John.

John Saager, Head of Investor Relations

Thanks, Kevin. As a matter of practice, going forward, we will begin the Q&A portion by asking our management team a few of the most pertinent questions on the minds of investors. For future reference, investors can submit questions through our Investor Relations inbox by emailing ir@quantumscape.com. This quarter's most frequently asked questions are as follows. Competitor progress and announcements. It seems like others are going to get to market before QuantumScape and have already achieved multi-layer. Can you talk about your progress as it relates to that of others like NIO, Toyota, and Solid Power?

Jagdeep Singh, CEO

Sure. The key point to note here is that it doesn't help to have a multi-layer cell that uses a single layer building block that doesn't work. It will be the equivalent of trying to put up a multi-storey building when you haven't been able to make a single-storey building without collapsing on itself. So we haven't seen any data from any of the competitors that has shown a solid-state separator capable of delivering long cycle life, high current densities without requiring elevated temperatures. As a result, the players you just mentioned fall into one of two categories: those that have reverted back to carbon-based cells, which result in a loss of many of the key benefits of the solid-state lithium-metal architecture including energy density and fast charging; and those that use lithium-metal but can only work under compromised test conditions, making those cells not commercially viable. We believe we are the only player to have shown a solid-state lithium-metal single layer building block capable of meeting the key requirements of long cycle life, high current density, and operating at unelevated temperatures. So for those who are interested in learning more, we've actually published a survey of the solid-state battery market, and you can find it on our website.

John Saager, Head of Investor Relations

Okay, great. Between 1C and C/3 charge industry, and it simply will refer to the rate of charge and discharge. The letter C in that description refers to one charge or discharge, and the number refers to how many such charges or discharges can be performed in one hour. So 1C means one charge or discharge per hour, C/3 means one-third of the charge or discharge in one hour. One full charge or discharge in three hours. I note that high 1C rates are more stressed on the battery adversely impacting cycle life, so lithium-ion battery cycle life testing is often quoted at C/3 rates because the QuantumScape technology is robust under high power conditions. We want to be able to run out cycle life test at 1C rates which allows for faster data collection and shorter development cycles. Finally, I'll point out that with conventional batteries, we can either be designed to be energy cells with high energy but low power, or power cells which have high power renewable energy. What are the unique things about the QuantumScape technology is this is an energy cell with a target of 1,000 watt-hours per liter, higher than the cells used in today's conventional batteries which are around 700 or so watt-hours per liter. But considerably charge at high rates as shown by our 4C 15-minute target. Okay, great. Our next question is how will future improvements in lithium-ion chemistries affect your batteries?

Jagdeep Singh, CEO

Sure. Most of the improvements in the world of lithium-ion stem either from better capital expenditures or better anodes. On the capital expenditure side, we're completely exhausting that. So we're able to take advantage of any improvements in capital technology including material level improvements, such as higher liquid content as well as manufacturing level improvements, such as dry electrode processing. Because these improvements are being driven even by material suppliers who sell to us or in some cases automotive OEMs to whom we sell to, we believe we will have access to both of these sources. Now on the anode side, the improvements are related to adding a certain amount of silicon to the carbon anode. Silicon can hold more lithium than carbon. However, silicon expands and contracts so much during cycling that it adversely impacts the cycle life of these cells. Consequently, the amount of silicon used in these cells is limited to a fraction of the anode. As a result, this approach only provides a small benefit in energy density. By contrast, the lithium-metal approach eliminates 100% of the carbon or silicon anode resulting in a significant increase in energy density. Thus, we see ourselves with the lithium-metal approach as being able to deliver greater density than conventional lithium-ion even into the future.

John Saager, Head of Investor Relations

Okay. And our final question. What makes you feel like you'll have a sustainable cost advantage over the rest of the industry?

Jagdeep Singh, CEO

So in our architecture we eliminate the traditional carbon or silicon anode entirely, which means we get rid of the anode materials, the anode electrode manufacturing line and the anode formation process, which is a multi-week long process in which a chemical side reaction is allowed to occur between the carbon particle and liquid electrolyte. As a result, given we believe our separator will be in the same order of magnitude and cost as conventional separators, we expect that the quantitative approach should be at a lower cost than conventional lithium-ion cells at any given manufacturing scale.

John Saager, Head of Investor Relations

All right. Thank you, Jagdeep. We're now ready to begin the Q&A portion of today's call. Operator, please open the lines for questions.

Operator, Operator

Thank you. Our first question comes from Mark Delaney from Goldman Sachs. Please go ahead. Your line is open.

Mark Delaney, Analyst

Yes, good afternoon. Thanks very much for taking the questions, and very happy to have the company having its first earnings call. I wanted to ask about the pre-pilot facility that you announced today. And the additional cells this is going to give the company to work with. Do you think that changes your outlook that you articulated in the investor deck in terms of what kind of revenue the company can be generating either in terms of perhaps generating revenues somewhat sooner than the current 2024 projection or potentially higher in magnitude compared to previously outlined projections?

Jagdeep Singh, CEO

Yes. Hi, Mark, this is Jagdeep. The QS-0 is really designed to not directly generate cells that we will provide to our automotive OEMs for test cars, but it does have an indirect effect by increasing the likelihood of a successful rollout of QS-1 and future manufacturing builds. That's what I was considering regarding the purpose of QS-0.

Mark Delaney, Analyst

That's helpful, thanks. And then you in terms of the run rate on operating expenses that the company guided to for this year. So I think 50% to 60% of the cash outlays that you put in your shareholder letter. I think the implied operating expenses in 2021 are a little bit above what is implied in the last Investor Presentation for 2022 operating expenses. So it seems like perhaps the company is taking a bit planned investment levels, and I assume that correlates with this QS-0 and some of the ability that the company has to do a bit more, but I am hoping to better understand to what extent you are in fact taking up your operating expenses compared to the prior plan.

Jagdeep Singh, CEO

Kevin, do you want to take that one?

Kevin Hettrich, CFO

Sure. Mark, as you might have noticed from our current run rate, we spent $27.2 million on operating activities in Q4 and $10.2 million on capital expenditures. As you pointed out, the guidance for 2021 was between $230 million and $290 million, with approximately 40% to 50% dedicated to QS-0. QS-0 is additional to the plan, meaning the operating expenses may be slightly higher as we approach 2022 and beyond. We do not have specific guidance on that figure in this call.

Mark Delaney, Analyst

Interesting. And just lastly, in terms of some of the operational milestones. Thank you for the update on the multi-layer. And that's good to learn more about. The other area that was discussed by the company was getting the yields up on the separator manufacturing, I don't know if there's anything on that front that you're able to share with us today.

Jagdeep Singh, CEO

Yes. So, it's Jagdeep. Yes, there is nothing we're showing today on that, but I think the important milestone really was demonstrating that when you take single layer cells and make multi-layer stacks out of them, in this case four-layer stacks that capacity retention and the cycle life behavior doesn't change materially. So that's really what we were excited about. And as I pointed out in the opening remarks, obviously there is more work to be done there to scale up production and to have the layers at the actual production size of 70 to 85 and to deal with any other unforeseen issues that might arise. And so as we complete that process, but the core result that the single layers can indeed be stacked into multi-layer cells with data that looks substantially very similar to what data we showed to similar cells. That's very exciting to us. And to have that at this sort of the year just means that we have the rest of the year to accomplish the rest of those tasks that I mentioned in terms of scaling.

Mark Delaney, Analyst

That's very helpful. Thank you.

Jagdeep Singh, CEO

Sure. Great questions.

Operator, Operator

Thank you. And our next question comes from Adam Jonas from Morgan Stanley. Please go ahead. Your line is open.

Adam Jonas, Analyst

Thank you. Hello, everybody. Hey, Jagdeep. First, great disclosure. Thanks for that. Couple of questions. On QS-0, I think it gives you, to your point, a chance to test prototypes with other say non-Volkswagen customers and potential customers as well. I'm curious, if today you're able to update us on the status of any discussions with non-VW customers. As I imagine, your IPO or the listing of the company itself and all the attention around it can create a lot of interesting commercial benefits. I'm curious if that you've seen an uptick in those discussions or anything you care to update us at this time? And then I have a couple of follow-ups.

Jagdeep Singh, CEO

Thank you for the question, Adam. As you pointed out, our public profile has led to a significant increase in inquiries that we are currently addressing. We have previously mentioned that we have undergone testing with several automotive OEMs. While Volkswagen is the only partnership we have announced so far, it's important to note that this partnership is non-exclusive. We plan to collaborate with additional OEMs over time. Although we are not making any announcements today, we fully anticipate working with multiple OEMs in the future. Additionally, we are also seeing interest from other industries, such as stationary storage for the grid and consumer electronics. At present, our ability to supply customers is limited by our production capacity. However, as we bring QS-0 online, we will be able to increase our cell production, allowing us to make this technology available to more customers with specific needs.

Adam Jonas, Analyst

Thank you, Jagdeep. My next question is about the location of the QS-1 factory and the expansion in Europe. Many on this call likely assume it could be in Germany. I'm unsure how you're considering this, especially given that other battery capacity investments are increasingly near renewable energy sources, with Norway being a prominent example. I'm interested in your perspective on balancing proximity to Volkswagen versus manufacturing powered by renewable energy, given the energy-intensive nature of the process. Thank you.

Jagdeep Singh, CEO

Yes, it's a great question. And I think what I can tell you is, those are exactly the kind of issues that we need to balance as we make those facility decisions. So on one hand, the trend in the industry is locating battery manufacturing close to where the vehicle manufacturing is taking place. On the other hand, you also need to balance the supply chain aspects of facility decisions that include power and also comes other supplies that go into the battery includes labor. So it's a multi-dimensional kind of a problem. And I think the main takeaway is the facility is likely to be close to where the vehicles are manufactured. But the question of how close is going to be a function of how those other dynamics come into play?

Adam Jonas, Analyst

Okay. And just a final one for me Jagdeep, you mentioned other markets. When I hear you talk about the energy density both gravimetrically and volumetrically, of course, there are direct implications to electric aviation in eVTOL market. And some of the scenarios we're running at least, the size of those markets could be in some cases very, very large. In some cases maybe even larger than the automotive market. I'm curious what you think about that market potential of eVTOL urban air mobility, is it something that you at a high level are exploring even though you don't mention it and call it out specifically in your prepared remarks?

Jagdeep Singh, CEO

Yes, that's a good question. eVTOL is definitely a very interesting new emerging area, and we are in fact in discussions with players in that sector. It's a little too early for us to be able to predict just how big that market will be, and when it starts taking off? But as you correctly surmised, that market is extremely sensitive to the gravimetric energy density in particular. Could that obviously impacts the whole application significantly. And so the energy density benefits that we are offering make it a really compelling fit for that application. So I think what it comes down to in the end, we are, in the near-term at least, in very near-term, we're going to be somewhat capacity constrained, and what that gives us the luxury of is really being able to pick those markets that have the most compelling fit in terms of the overall application, the economics for us, for our customers and so on. But as we make progress on them, I'm sort of narrowing down some of those near-term expansion markets. I will be sure to communicate them as well, Adam.

Adam Jonas, Analyst

Thanks, Jagdeep.

Jagdeep Singh, CEO

Operator, if there is another question, we can go.

Operator, Operator

Please go ahead. Our next question comes from Rod Lache from Wolfe Research. Please go ahead. Your line is open.

Rod Lache, Analyst

Hi, everybody. I wanted to ask about the challenges in testing and transitioning to 8 to 10 layers. Could you provide some insight into the additional obstacles you need to address? I assume there are volumetric changes that the cells experience during construction with lithium, and how many layers do you expect in the final commercial product? Additionally, what were the main development challenges you overcame to reach this point?

Jagdeep Singh, CEO

Yes, it's Jagdeep. The number of layers varies based on the specific customer, cell design, and margins. There's no single answer, but typically there are a few dozen layers for almost every type of cell we produce for different OEMs. The range is more than a dozen but fewer than a few hundred. The main immediate challenge is to produce more materials to make more cells. With multi-layer cells, you require significantly more materials; for instance, a four-layer cell necessitates four times the manufacturing capacity, while a ten-layer cell requires even more. We originally set our engineering lines for single-layer cell development. After sharing single-layer data in December, we began ramping up our production tools, but these tools come with lead times. We can't just increase production instantly, as we are waiting for the ordered tools to be delivered and set up. This is the primary immediate constraint on multi-layer cell production. Once we have the additional capacity in place, we will be able to create more cells and complete the necessary engineering work to finish the development. When we achieve our target of 8 to 10 layers by the end of the year, we will have the foundational elements necessary to produce cells for our customers.

Rod Lache, Analyst

Okay, great. Thank you. And can you just give us an update on your latest thoughts on scaling? Just assuming that everything goes well with the pilot line in 2024, presumably, you're going to want to scale this as much as possible with a variety of manufacturers, so what could the economics of that look like as you want to expand beyond 2024?

Jagdeep Singh, CEO

Well, I mean, just to make sure, I guess the question you're asking about kind of the business model so for how we might do more production capacity or is that?

Rod Lache, Analyst

Yes, I would assume that you would want to leverage capacity that's being built by a variety of different cell manufacturers elsewhere, right? So that would involve some licensing arrangements. It would be challenging to manage that all by yourself?

Jagdeep Singh, CEO

Yes. So what we've said is there are sort of handful of key fundamental ways you could do production, right. The simplest way is to do it all yourself. That's ones you mentioned, right. The next way is we have this JV type model that we're doing with Volkswagen. In that case, we're obviously bringing the core solid-state battery expertise, and they're bringing a lot of general high volume, high quality manufacturing background. The other model is where we can actually outsource some of the components that go into our cells. For example, the real unique part of what we're doing is of course the solid-state separator. Some of the capital work could potentially be done by third parties. So we're obviously exploring that. The ultimate, I think in terms of whether we might license the IP to a third-party manufacturing company. The challenge there, of course, is just IP protection, IP diffusion, but you don't want to license IP to somebody unless you have super high confidence that IP is going to be protected. Otherwise, you're kind of diluting the fundamental technology of the company in some way. So I think what we're doing is trying just look at the economic tradeoff and balance between those different models. For sure, we're doing the JV with VW, for sure we are doing our own production with QS-0, and we have no particular desire to spend any of our capital or any of our team's energy or bandwidth on to do things that can be done better elsewhere, or they are already being done elsewhere. We want to basically focus on things that are not available elsewhere, so if we can buy something that has sufficient quality and reliability to meet our needs from a third-party, we'll do that. It's only if somebody doesn't make something that we need that we want to do it ourselves. That's the general philosophy that you can assume we will use going forward in that side.

Rod Lache, Analyst

Great. Thank you.

Jagdeep Singh, CEO

Sure.

Operator, Operator

Thank you. And our next question comes from Ben Kallo from Baird. Please go ahead. Your line is open.

Ben Kallo, Analyst

Hey congratulations, guys, on the first conference call. Thanks for all the information. One of the things you talked about, and we're still trying to understand the layering and congratulations on that stuff. Once you have the sufficient number of layers, how difficult do you anticipate it is to transition into a pack? That's my first question.

Jagdeep Singh, CEO

Yes. Hey Ben, how are you? Thanks for the question. So the number of layers as I mentioned earlier that we have is going to be really a function of what the particular pack in module need. So it will kind of be designed with the packing modular line. And once you have that sound with the right number of layers, then the pack level design is relatively speaking, straightforward in the sense that the electrical behavior of these cells is similar to what is already being used. We use the same cathode material that's conventionally being used, so the discharge profile electrically will be very similar. The thermal behavior of these cells we expect will be better because the lithium-metal, it makes up our anode is a much better conductor of heat than traditional carbon-based anodes. So we can dissipate heat much, much better. Also, our separator is much more tolerant to heat; it's stable to very, very high temperatures. The BMS interface should be very similar to conventional BMSs. So we think that integrating at a pack level should require engineering, of course, but because the cells have already been designed, we don't expect any fundamental challenges there. But the real key is just being able to complete this multi-development that we showed that we given data on earlier today.

Ben Kallo, Analyst

Okay. You've mentioned consumer electronics and then stationary storage and potentially other markets. Could you talk about why because they're counterintuitive to me but consumer electronics seems like it could be the easiest market to go after with less onerous requirements around the packs of the batteries themselves. But maybe that's just the Volkswagen relationship that it is moving towards automotive market first?

Jagdeep Singh, CEO

That's a great question. We spent several years determining which markets to pursue. Many battery companies try to address everything, but we believe that as a startup, we needed to focus; trying to do too much would ultimately lead to failure. We chose to target a limited number of markets and solve their challenges effectively. Our analysis shows that the consumer electronics market is indeed easier to enter since it doesn't require the same power density, and no one is asking for a 15-minute charge for a cell phone. The temperature conditions are less extreme, and as a result, you don't need as many layers in the battery design. However, we noticed that the automotive sector represents a significantly larger market. For example, each long-range global Tesla Model 3 vehicle contains batteries equivalent to those of 10,000 iPhones, which is a massive difference. Even if Apple sells around 200 million devices annually, that volume is comparable to just a small pilot production line for us, far less than what we plan for our first VW Phase 1 power line. Furthermore, consumer devices are looking to reduce the battery size to allow for more functionality in their products, but these devices have already well-defined designs. In contrast, there is substantial opportunity in the automotive market, which we see as a disruptive enabler for higher penetration rates. Given the significance of our technology in the automotive industry and the market's size, we decided to focus on this area early on, and it proved to be a wise choice as we established a strong partnership. We believe we've executed our strategy effectively so far, tackling this complex problem first to set the groundwork for future expansions into other sectors.

Ben Kallo, Analyst

That's very helpful. And just if I could sneak in one more. Thank you for the helpful landscape paid for here. I was wondering how difficult or how you guys get the information from your competitors. Are you able to actually get cells and test them, and then vice versa, our people out there are able to get your selves and test them as well. Thank you.

Jagdeep Singh, CEO

Yes, those are excellent questions. Many other companies in the solid-state battery sector are either startups or small research teams within larger organizations, and we gather a lot of our information directly from published papers, social media, and various websites. We also have our own mission, which began when we started the company, as we were searching for solid-state materials without clear answers a decade ago. We went through numerous materials in our labs, experimenting with many sulfides and polymers, which allowed us to understand the limitations and challenges firsthand. For instance, while sulfides are good conductors and have similar purity levels to today's liquid electrolytes, they can't prevent dendrite formation and are the least stable among common solid materials. If the voltage goes above 2.4 volts or below 2.2 volts, it leads to fundamental instabilities, resulting in unwanted chemical reactions and increased resistance, which ultimately degrades the cells. Our extensive work with these materials has given us the confidence that solving these issues isn't straightforward. Many are exploring material systems, but we hope they can find solutions in a significantly large market where multiple players can certainly coexist without diminishing our opportunity. However, we haven't seen anything compelling yet. A lot of announcements have been made by others, but few have presented solid data, and the data that has been shared often reveals compromised test conditions. Essential requirements include having a solid-state separator capable of handling high current densities for rapid charging, ideally at normal temperatures around 30 degrees Celsius, rather than elevated temperatures. We've successfully tested our technology with minimal degradation over 800,000 cycles, and to our knowledge, no one else has demonstrated similar results. We also believe that trying to build multi-layer cells isn't a viable strategy if single-layer systems can't stand up; one doesn't solve a fundamental issue by simply adding more layers. Our understanding of competitive alternatives comes from analyzing published research and our extensive experiments in our labs.

Ben Kallo, Analyst

Thanks, again.

Operator, Operator

Thank you. And our next question comes from Joseph Osha from JMP Securities. Please go ahead. Your line is open.

Joseph Osha, Analyst

Hello, everyone. I want to express my gratitude for the excellent disclosure. I have a couple of questions. On this chart in your industry overview, you're showing different cathode materials. This raises the question about your focus on a more commodity solution. Have you discovered any interesting insights or strategies regarding the cathode material? I also have a follow-up.

Jagdeep Singh, CEO

Yes, one important point we highlighted is that our system is quite cathode agnostic. This means that once we have a solid-state separator that functions well, we can utilize any cathode. Furthermore, this type of system actually allows us to access a wider variety of cathodes for traditional cells because our solid-state separator creates an electrical barrier between the cathode and anode. In a standard cell, as illustrated in our previous presentations, the configuration includes a cathode layer, a porous polymer separator, and an anode that could be made of materials like carbon or silicon. The entire cell contains a liquid electrolyte that facilitates the movement of lithium ions, and this liquid is in contact with both the cathode and the anode. This necessitates that the materials must be stable at both the low voltage of the anode and the high voltage of the cathode, which makes it challenging to find natural materials that have that extensive stability range. By isolating the cathode with our electrical insulator, we eliminate the need for materials that are stable at lower voltages, enabling us to choose from a wider array of materials for both the cathode and the catholyte. In short, we hold numerous patents on various types of cathodes, including patents related to metal fluorides, which are known for their high energy density. The chart you mentioned shows several cathode materials, particularly those with high density on the far right. However, we did not see a need to commercialize them immediately because the solid-state separator combined with a lithium-metal anode already provides a significant advantage, allowing us to concentrate on bringing that technology to market before exploring these new cathode materials for future growth.

Joseph Osha, Analyst

And I assume your customers don't want to mess with exotic transition metal cathodes anyway.

Jagdeep Singh, CEO

Well, yes, just it will complicate a little bit the electrical interfaces that I mentioned earlier. So this way we talk about a simple renovation in the pack absolute.

Joseph Osha, Analyst

Okay. Second question, and in another sort of PVD and CVD processes where you're making layers of things, you add layers, things are going to always go right. But in the end rather than having material be wasted entirely what you can do is depending on the amount of imperfections you've got. So I'm just wondering, if you're looking at your process and I've got 36 layers or whatever, and if something goes wrong and layer 35 is there way of being that; so use it or do you lose the whole thing?

Jagdeep Singh, CEO

Yes, I believe it’s a good approach. At this point, our main focus is on increasing overall production volumes. However, over time, using units that don’t meet specifications for one application but do for another is a solid strategy, especially in the semiconductor industry. Instead of scrapping these units, we can repurpose them for lower value applications. This is precisely the kind of planning we are undertaking. For now, we are primarily concentrating on boosting our production base by employing more staff and utilizing increased automation and continuous flow processes.

Joseph Osha, Analyst

Okay, great. And then my last question, sorry for the multiple questions. I know you had said that all of the initial learning is around the pouch cell form factor. I mean has there been any additional thinking on whether this could work in the prismatic or cylindrical form factor? And that's it from me. Thank you.

Jagdeep Singh, CEO

Good question. We have indicated that we don't anticipate using cylindrical form factors. While our separator is not designed to be flexible for ceramic applications, it does have a good amount of bending ability without damaging the film. We do not plan to pursue cylindrical formats. Both prismatic pouch and prismatic can cells are certainly areas of focus. Ultimately, we'll collaborate with our automotive OEMs to determine the packaging format that is most suitable for their applications. We have no strict preferences regarding this at QuantumScape; our value creation lies in the materials used in the battery and how we package them. We intend to allow OEMs to play a significant role in guiding us in this area.

Joseph Osha, Analyst

Super. Thank you for the seminar. It's great.

Operator, Operator

Thank you. And this concludes the Q&A portion of our call. I'll now turn the call back to Jagdeep Singh for closing remarks.

Jagdeep Singh, CEO

Yes, I just want to say thank you everybody for joining us on this call today, our first earnings call. We look forward to reporting our progress to you over the rest of the year. We will plan using the same format for our subsequent calls. We will issue a shareholder letter that highlights the progress for the quarter. We have a short earnings call, which will present a few highlights of the shareholder letter, and then really spend most of the time on Q&A. Look forward to continuing to work with everybody going forward. Have a great afternoon.

Operator, Operator

Thank you for joining us today. This concludes our call. You may now disconnect.