QuantumScape - Q3 2023

Transcript

Operator (participant)

Good day, and welcome to QuantumScape's third quarter 2023 earnings conference call. John Saager, QuantumScape's Vice President of Capital Markets and FP&A, you may now begin your conference.

John Saager (VP of Capital Markets and FP&A)

Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape's third quarter 2023 earnings call. To supplement today's discussion, please go to our IR website at ir.quantumscape.com to view our shareholder letter. Before we begin, I want to call your attention to the Safe Harbor provision for forward-looking statements that is posted on our website as part of our quarterly update. Forward-looking statements generally relate to future events, future technology progress, or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

There are risk factors that may cause actual results to differ materially from the content of our forward-looking statement for the reasons that we cite in our shareholder letter, Form 10-K, and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be QuantumScape's Co-founder, CEO, and Chairman, Jagdeep Singh, our CFO, Kevin Hettrich, and a new addition to our team, Dr. Siva Sivaram, President. With that, I'd like to turn the call over to Jagdeep.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Thanks, John. I'd like to begin today's call by introducing our newly hired president, Dr. Siva Sivaram. Siva holds a Ph.D. in Materials Science and brings extensive experience in high-volume manufacturing of advanced technology products, most recently serving as president at Western Digital, a global leader in solid-state and magnetic data storage. Before that, he held leadership positions at pioneering and technology companies, including SanDisk, Matrix Semiconductor, and Intel. We're thrilled to have him on board. I'll start by covering our customer prototype testing. As we reported last year, we shipped our first A0 prototype cells to prospective customers in Q4 2022, with the goal of providing a proof-of-concept demonstration of a 24-layer anode-free solid-state lithium metal battery cell.

We can now share that our top-performing A0 prototype cell in our automotive OEM's battery testing labs achieved over 1,000 full cycle equivalents with over 95% discharge energy retention using customer-specified test conditions of C/3 charge and C/2 discharge with our standard temperature and pressure conditions and 100% depth of discharge. I'd like to point out that this is the best-performing cell, and we have work to do on aspects such as reliability. Nonetheless, this is an exceptional result. We're not aware of any automotive format lithium metal battery that has shown such high discharge energy retention over a comparable cycle count at room temperature and modest pressure, regardless of C rate.

We believe that no competing electrolyte, solid or liquid, has demonstrated sufficient stability with lithium metal to achieve this, and that this result sets a new high watermark for lithium metal battery performance. This result is especially meaningful because the A0 prototype has the same number of layers as our production intent cell and uses our proprietary cell format. Together with the higher loading cathode results reported in our Q1 2023 shareholder letter, we have now separately demonstrated three key aspects of our production intent cell design: 24 layers, higher cathode loading, and our new cell format. When these aspects are combined, along with improvements to packaging efficiency and manufacturing process controls and automation for improved reliability, it forms the core of our first commercial product, QSE-5. The cover photo of this quarter's shareholder letter shows a mock-up of our QSE-5 cell format.

It's important to keep in mind that since QSE-5 will have higher loading cathodes and more efficient packaging than our A0 prototype cell, it will sustain higher current densities and be built with tighter margins, resulting in more stress on the cell. We must also continue to work on producing these cells in large volumes with high quality and reliability. These factors present significant challenges. Nevertheless, we believe this remarkable result makes clear that our technology can achieve disruptive performance at commercial intent layer counts, further increasing our confidence in the transformative potential of our technology and product roadmap. Next, a word about our customer engagements. Right now, our primary focus is on QSE-5 development, with the goal of enabling superior performance on a range of potential automotive applications across motorsport, passenger, and commercial vehicles, including motorcycles, cars, trucks, and SUVs.

As we reported last quarter, we're collaborating closely with a prospective large customer in the automotive sector for QSE-5. While the scale of this initial application is by design small, it represents an important vehicle proof of concept that we believe has high visibility and the potential to lead to other programs in the future. We're pleased with the progress the joint teams have made so far on module and pack integration and system design, though significant work remains. For example, we continue to refine and finalize the design parameters of QSE-5, which will determine the specific thermal and mechanical behavior of the cell. Beyond automotive, we remain engaged with prospective customers in the consumer electronics sector, and in Q3, we entered into a technology evaluation agreement with a leading global consumer electronics player.

We believe the ability of our solid-state platform to maintain good cycling performance with zero externally applied pressure meets a key design requirement for these applications. The single-layer sister cells that we first reported on in our Q3 2022 shareholder letter have now achieved between 1,500 and 2,000 cycles, to approximately 80% discharge energy retention, with zero externally applied pressure. Next, an update on our product development. Our planned first commercial product is QSE-5, which uses the proprietary format first demonstrated in A0 prototypes last year. This innovative format is a hybrid of conventional pouch and prismatic cell designs to address the uniaxial expansion of lithium metal as it plates and strips during charging and discharging. We call this novel format FlexFrame.

A key technical goal for the year is to improve cell packaging efficiency relative to the A0 prototype cells we ship to prospective customers in 2022. This involves reducing the space taken up by the inactive material and FlexFrame package, as well as increasing the amount of active material in the cell, which we expect will enable the final commercial design to reach our energy density targets. When comparing the A0 prototype to our current B0 design, the B0s are designed to pack the same number of layers with more energy per layer into a slimmer cell package. We plan to provide a detailed look at the innovative FlexFrame architecture in an upcoming webinar. Now, let me hand it over to Siva, for an update on our manufacturing scale-up.

Siva Sivaram (President)

Thanks, Jagdeep. I'll begin with an update on our Raptor process. As a reminder, Raptor is designed to deliver up to three times as much throughput using similar equipment to our last generation process, while applying less energy per separator. In Q3, we began process qualification of Raptor equipment on schedule. Process qualification involves producing films, gathering data to characterize their quality and consistency, and using that feedback to refine our process specs. We are pleased with the early returns from the qualification testing, and while there is work remaining to dial in this process, we continue to target deployment of Raptor by the end of the year. We also continue to make progress on our next generation Cobra process, which is planned to support higher volume B sample production from our consolidated QS-0 pre-pilot line.

Along with separator heat treatment equipment, in Q3, we took delivery, installed, and commissioned key pieces of equipment related to process automation, such as unit cell assembly equipment. More automation not only increases our cell production capacity, but also reduces manual handling, which is a common source of run-to-run variation and tends to adversely impact reliability. We plan to continue process development and automation deployment to enable higher quality, consistency, and throughput as we build out our manufacturing capability. Overall, we are pleased with our manufacturing scale-up progress, but more work remains, including continuing to drive our defect reduction and quality improvement initiatives, integrating advanced metrology and data collection, and developing additional process automation. With that, let me turn things over to Kevin for an update on our financial outlook.

Kevin Hettrich (CFO)

Thanks, Siva. Third quarter 2023 capital expenditures were $18 million. GAAP operating expenses were $121 million. Cash operating expenses, defined as operating expenses less stock-based compensation and depreciation, were $64 million. For the full year 2023, we maintain our guidance on cash operating expenses of $225 million-$275 million, and revise our CapEx guidance to $75 million-$100 million. Approximately one-third of the reduction in expected CapEx spend is due to realized savings. Examples include successful value engineering, negotiated price reductions, and completion of certain projects under budget.

The remaining approximate two-thirds is due to shifts in timing, which can be broken down into 3 broad categories: Certain items we deferred because we had additional schedule buffer, items where we previously forecasted more front-loaded payment timing than what will actually be required, and updates to aspects of our equipment strategy. Despite these changes in the timing of CapEx, we continue to target low volume B samples in 2024, and higher volume B samples in 2025. During Q3, our CapEx primarily went toward facility and equipment spend for our consolidated QS-0 pre-pilot line, including for our Raptor process. For the remainder of the year, our CapEx will continue to be predominantly allocated toward QS-0. During the quarter, we raised $300 million in gross proceeds from our public follow-on offering.

We ended Q3 with over $1.1 billion in liquidity, and continue to look for opportunities to optimize our spending and be prudent with our strong balance sheet. We now forecast that our cash runway will extend into 2026. Any additional funds raised from capital markets activity, including under our ATM prospectus supplement, would further extend this cash runway. Longer term, our capital requirements will be a function of our industrialization business model, which we believe could reflect a mix of wholly owned production, joint venture, and licensing relationships. With that, I'll hand things over to Jagdeep for a final word on our strategic outlook.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Thanks, Kevin. Fundamentally, our focus for 2023 is simple: turn the corner from prototype to product. Our key milestones are all aimed at advancing product development to build a sufficient level of technical and manufacturing maturity to enable initial production of the QSE-5 cell. With just a few months remaining in the year, we're maintaining aggressive near-term schedules and remain focused on bringing a potentially disruptive first product to market in the near future. But strategically, our mission is bigger than a series of near-term objectives. We've been pursuing a next-generation electric vehicle battery for over a decade, and with a mission as challenging as, and important as this, long-term thinking is indispensable. Moreover, the market opportunity for our technology platform is massive, potentially in the hundreds of billions of dollars annually for decades to come.

With that in mind, this year, we've also taken steps to strengthen our long-term strategic position. For example, this quarter, we seized the opportunity to fortify our balance sheet, extending our forecasted cash runway into 2026 and securing funding for pivotal development and deployment milestones, including higher volume B samples based on our Cobra separator process, which, if achieved, would have a transformative effect on our business. We've also built on our strong customer relationships and deepened our engagement with a prospective launch customer for our first product. We continue to add manufacturing experience and technical excellence to our team at every level. At the close of Q3, we feel prepared to face the inevitable and innumerable short-term challenges on the way to our goal because we've laid a strong foundation for long-term success.

We look forward to reporting on the challenges and the successes in the quarters to come.

John Saager (VP of Capital Markets and FP&A)

Thanks, Jagdeep. We'll begin today's Q&A portion with a few questions we've received from investors or that I believe investors would be interested in. Jagdeep, we'll start with you, and I wanted to ask about our newly hired president, Dr. Siva Sivaram. Could you tell me a little bit about your expectations for him in his new role, and why you felt somebody with his background and experience was a good fit for us at this stage of our development?

Jagdeep Singh (Co-Founder, CEO and Chairman)

Sure. So we're thrilled to have Siva join the team. We've said that our main goal for the year was to turn the corner from prototype to product. In support of that, we've been working on the scale-up of the manufacturing processes, equipment, and automation associated with higher volume, higher quality production. A key part of this is, of course, having the expertise needed to do this. We wanted to bolster our senior management team with someone who brought not only super high volume production experience, but experience in sophisticated manufacturing processes, such as those found in the semiconductor or magnetic storage industries.

But we don't think we could have found a better fit than with Siva, who, as President at Western Digital, ran one of the world's largest data storage companies with $18 billion in revenue in 2022 and something like a 40% share of the hard drive market. The company shipped literally millions of units per year, and these units involved highly advanced manufacturing processes and supply chains. For example, as you might know, modern disk drives have magnetic heads that float on the order of 5 nanometers above the surface of a platter that's spinning at several thousand RPM, and do this repeatedly and with very high reliability. He was also a pioneer in multilayer semiconductor technology, which now routinely achieves over 200 layers. We think all of his experience will be invaluable as we scale up our equipment and increase our quality and reliability.

John Saager (VP of Capital Markets and FP&A)

Okay, and now a question for Siva. Siva, now that you've been with QuantumScape for a couple of months, I wanted to get your initial impressions as well as your assessment. Why do you think QuantumScape's technology is scalable, and what needs to be done to make that happen?

Siva Sivaram (President)

Thanks, John. It's been a very active and involved last couple of months. Even before I came to the company, I spent a lot of time developing an understanding of the electrochemistry, the material science, the thermodynamics of QuantumScape's technology. But now that I'm here, what has impressed me, first and foremost, is the quality and commitment of the people, the depth of expertise and experience that's here within QuantumScape. I see the rigor that we have in the development and the collection and management of data. It gives me confidence in the company's core competencies. It's very interesting to note the similarities to my prior semiconductor and magnetic storage experience, whether it is in hard drive assembly, semiconductor back-end, or battery manufacturing. As we scale to higher volumes, the key to scaling is defect reduction, process control, and a high level of automation.

I've also seen that the ecosystem at QuantumScape is very well developed to provide the incoming materials, equipment, setting up a very robust supply chain. The depth of interaction with top-tier customers. They have studied feedback. This sets the tone for continuous improvement as we ramp. Overall, the company and the technology are well poised for scaling.

John Saager (VP of Capital Markets and FP&A)

Great. Thanks so much, Siva. Kevin, turning to you, a question submitted by one of our investors: Can you provide some additional context on the $300 million follow-on offering closed in August? How does this fit into your long-term approach to capital management?

Kevin Hettrich (CFO)

Thank you, John, for the question on behalf of the investor. In the first half of this year, we hit several product and manufacturing milestones on the path to commercialization. We believed that the time was right for a follow-on equity offering based on the product, manufacturing, and customer momentum of the company. On the product development front, recall that in our Q2 shareholder letter, we shared higher cathode performance, higher cathode loading performance data and shipped unit cells with these cathodes to multiple partners. On the manufacturing front, in Q2, we completed site acceptance for our Raptor equipment, tracking to our year-end goal to deploy the fast separator process. And on the customer front, we had announced that we engaged with a prospective launch customer in the automotive space to bring QSE-5 to market.

So we felt like we were on strong footing on a number of fronts and wanted to ensure that our capital runway would extend into 2026, which funds the build-out of our QS-0 Cobra line and production of our higher volume B samples targeted at the end of 2025.

John Saager (VP of Capital Markets and FP&A)

Okay, great. Thanks, Kevin, so much for that insight. Jagdeep, with approximately two months left in the year, can you summarize for our investors how we're tracking against our 2023 goals that we laid out for investors in February? Specifically, what work remains to be done?

Jagdeep Singh (Co-Founder, CEO and Chairman)

Sure, John. So at the beginning of the year, we laid out 4 key goals for the year that we thought were critical to helping turn the corner from prototype to production. The first was to increase the loading of the cathode from approximately 3 milliamp hours per centimeter squared to approximately 5 milliamp hours per centimeter squared to store more energy in the cell. We reported on the Q2 call that we achieved this higher loading cathode and in fact, shipped unit cell prototypes with this new cathode to customers. The second key goal was to improve the efficiency of packaging, and on this front, our new FlexFrame package incorporates a number of improvements from narrower edge margins to thinner current collectors and thinner adhesive layers. The other two goals were production-related and having to do with our Raptor process and reliability.

I'll turn it over to Siva to talk about those.

Siva Sivaram (President)

Thanks, Jagdeep. The third goal was to install and deploy our new Raptor process. We've installed and qualified the Raptor equipment. We are starting to produce high-quality films and are optimizing the process to meet our performance targets. We are making good progress towards Raptor deployment by the end of the year. And finally, on reliability, we have undertaken and completed over a dozen initiatives to reduce defectivity and are now focused on process enhancements that we believe will take our reliability up to a new level. Of course, reliability is never done. It requires an ongoing effort to weed out and eliminate potential failure modes, especially as we introduce new, improved, or scaled-up processes.

John Saager (VP of Capital Markets and FP&A)

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

Operator (participant)

Thank you. If you have a question, please press star one on your telephone keypad. If you wish to withdraw your question, simply press star one again. One moment, please, for your first question. Your first question comes from the line of Douglas Dutton with Evercore ISI. Your line is open.

Douglas Dutton (VP, Global Automotive and Mobility Research)

Hi, Jagdeep and Kevin. Welcome, Siva. Appreciate the nice update here. Can I just quickly ask for a little more detail on the B sample timeline? Specifically, if you can confirm when the timeline for production with Raptor looks to be right now. You know, previously, I believe you said about 18 months after the A sample, which would imply the B sample timing around mid-2024. This release only quotes calendar year 2024. So is there anything else you can tell us on the timing for those first B0 samples, given that it seems the Raptor certification and testing process is coming along well?

Jagdeep Singh (Co-Founder, CEO and Chairman)

Yeah, we're, as Siva mentioned, we're pleased with the way the Raptor qualification process is going. The equipment's been installed, and we're qualifying the process as we speak for deployment later this year. And we do believe we're still targeting 2024 for the low volume B samples. When we provided the 18-month guidance, that, of course, was a general approximate guidance. But I think the targets that we're still tracking to are in 2024, is when we hope to have when we are targeting to have the first low volume B zero samples. Subsequently to that, we expect to have higher volume B samples using the new Cobra process before the end of 2025.

Those are the two key milestones for us, coming up, next year and the year after. Using the Raptor process to introduce low volume B samples in 2024, and the Cobra process, which is even faster, as you know, to introduce the higher volume B samples in 2025.

Douglas Dutton (VP, Global Automotive and Mobility Research)

Okay. Okay, that's helpful. And then, just a quick one on Toyota's solid-state news over the last couple of days. You know, the company's claiming a doubling of EV range with their solution. There's no, you know, quote, unquote, "new tech" here, right? They're simply adding in significantly more kilowatt hours, due to the smaller space required in a solid-state design, to achieve that stated range. Is that your understanding? Thanks, team.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Yeah. So first of all, I want to say that we're genuinely pleased to see a company like Toyota endorsing solid-state batteries as the future of EVs. We obviously agree; we've been on solid state for a long time. Having said that, Toyota has announced that it's using a sulfide-based approach, which does come with some challenges. We've done a lot of work on sulfides ourselves here. If you look at our patent portfolio, a number of the patents are in the sulfide space. And one of the key challenges with sulfide-based approaches is low cycle life that results from poor electrochemical stability and the propensity to form lithium metal dendrites. Now, if the dendrite problem isn't addressed, then there are sort of two basic options.

One is to revert back to a carbon or silicon-based host material, as opposed to lithium metal. But then that results in reduced energy density and power density relative to a lithium metal anode. And the other option is to run under what we consider to be a compromised test conditions, i.e., elevated temperatures, or very high pressures, or low rates of charge and discharge, or a short cycle life. So all of those approaches, we think, make the approach unsuitable for commercial vehicles. We're not aware of data from anyone that demonstrates that these fundamental challenges of lithium metal dendrite formation in sulfide-based systems has been addressed at room temperature and modest pressures. But if data exists, we welcome seeing it.

And of course, the data we shared today, if you look at the first chart in our shareholder letter, that shows data from our A0 24-layer prototype cells, which of course we shipped in 2022, that achieves 1,000 cycles with a remarkable 95% capacity retention. Which, as we mentioned in the call, we believe is a high watermark for cycle life in an automotive format, solid state lithium metal battery. So, we think the data is pretty clear on the capabilities of this approach.

Operator (participant)

Your next question comes from the line of Winnie Dong with Deutsche Bank. Your line is open.

Winnie Dong (Director and Equity Research)

Hi, thanks so much for answering the questions. I was wondering if you can elaborate on the challenges being written about in the shareholder letter, more specifically on combining the high cathode loading with more efficient packaging and then in the new QSE-5 format. Especially, what are the hurdles that, you know, need to be overcome, for this combination to be successful?

Jagdeep Singh (Co-Founder, CEO and Chairman)

Yeah, it's a good, good question. So as we pointed out in the letter, if you look at the differences between the A0 we shipped last year and the QSE-5 that we intend to ship next year, there's a few key areas where that account for the biggest differences. One is the layer count. I'm sorry, the layer count is in fact the same. We're shipping the QSE-5, which will be a 24-layer cell, and the A0 that we shipped last year were also 24-layer cells. So we've shown we can do that. The second thing that the QSE-5 needs to have is a higher loading cathode, so specifically a roughly 5 mAh/cm² loading cathode.

The A0 we shipped had a 3 milliamp hour cathode, and we showed earlier this year results from 5 milliamp hour cathodes. I think it was on the Q2 call. And we've since shipped those cells with those higher loading cathodes to customers. The third piece is we need to put all this into our new more efficient FlexFrame package. And we've mentioned on the call that we've already made progress towards that in the form of reduced margins and thinner adhesive layers and current collector layers. All those we think will play into that.

So when you take those three things that we've demonstrated separately and combine them together, and then add to that the improvements that we're talking about with reliability that come from process control and more automation, you know, you end up with the core of what is QSE-5. So I think the way we think about it is, from a risk standpoint, we believe we've demonstrated many of the key aspects of the QSE-5 cell already, separately. And sort of if you use software terminology at the unit cell level, unit test level, and now we just need to bring them together into an integrated cell.

So it's more of an integration task, but we now when we have QSE-5, than it is a task of, of, you know, developing fundamentally new features. So that's kind of where we are on QSE-5.

Winnie Dong (Director and Equity Research)

Thank you. That's really helpful. And then on the work with the prospective launch customer for QSE-5, is there any additional color you can provide in terms of, you know, initial customer feedback or testing feedback? For example, you know, are the design parameters that this customer is looking at in line with less or more stringent than, you know, the gold standards that you targeted in terms of cell performance?

Jagdeep Singh (Co-Founder, CEO and Chairman)

Yeah, that's a great question. So, one of the criteria we had to pick this initial launch customer was we wanted a customer that was excited about the QSE-5 cell as is. Because obviously we don't want to have to go redesign the cell or change the form factor, or do anything else that could delay our time to market. So we're, you know, pleased that this particular customer is in fact excited about the capabilities of QSE-5. And I think we reported on the QSE-5 capabilities in our last earnings call, where we showed a landscape map of energy versus power, and we believe that QSE-5 occupies a unique space in that landscape.

The other thing about this customer is that the volume needs that they have, we believe we can satisfy from our QS-0 facility here in San Jose. And then the final thing about this customer is that, the level of maturity they're expecting is consistent with what we believe we'll have with, our higher volume B samples. So on all three of those metrics, volume levels, maturity levels, and product functionality, this is a very good match, for what we have, and that's why we're excited, that's why both sides, in fact, are excited about this capability, and, we look forward to, continuing to work with them closely.

Winnie Dong (Director and Equity Research)

Thank you so much.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Absolutely.

Operator (participant)

Sorry. Your next question comes from the line of Ben Kallo with Baird. Your line is open.

Ben Kallo (Senior Research Analyst)

Well, hey, guys, thanks for taking my question. Siva, congrats on the new role. Just maybe, Siva, with your new role, we heard about, you know, what's similar to your previous roles. What do you think the difficulties are compared to your previous roles? And then I have a follow-up.

Siva Sivaram (President)

Thanks, Ben. My prior role has always been taking advanced technologies into very high volumes. How do we integrate the technology into materials, processes, and equipment and scale it up? I have done this several times in the past. When I came into QuantumScape, that's exactly what I am hoping to accomplish very soon. The technology is in a great place. The customer demand is there. The market is very large. It's up to us to now scale what we have into a product that we can deliver to customers, and I'm looking forward to that challenge.

Ben Kallo (Senior Research Analyst)

Jagdeep and Kevin, congrats on the race. It was smart. Just, you know, as you deploy capital and you have partners come in, you know, how has it changed, you know, as we move forward and, you know, you test out stuff? Like, are partners more willing to invest capital so you can save the money, or how do we think about this going forward with your capital deployment?

Kevin Hettrich (CFO)

Yeah, Ben, thank you for the question. First, on the $300 million gross proceed raise, we felt the timing was right based on all the momentum that we had during the year on the product with the announcement of the QSE-5, the manufacturing process with the Raptor equipment, in having passed that acceptance, and then all the customer traction that Jagdeep mentioned, where we're working with a prospective launch customer in the automotive space for that initial high visibility, small volume launch. Moving forward, I would also highlight that in prior calls, we are open to multiple different business models in the fullness of time.

We see options with holding on capacity, as is the case with QS-0, joint venture relationships, which you're well familiar with, as well as licensing relationships. Separately, as we've also discussed on my prior calls, there's a lot of momentum behind investments in clean energy, specifically closed-loop domestic supply chains here in the United States. Those are also things which we track those opportunities to be as capital light and efficient with the capital that we do have as possible.

Ben Kallo (Senior Research Analyst)

Maybe the last one. I was thinking, just with everything going on, I don't know, UAW, everything in the world, have you seen any of your partners, like, pull back from, you know, relationships and timelines or, partnerships with you guys?

Kevin Hettrich (CFO)

I would almost say the opposite. I think with turmoil in the world, and it's like the growing realization for the importance for the penetration of electric vehicles, both the direct and indirect jobs they can bring the importance to the environment, that we actually see more excitement around the space. And then within that, what differential battery technology like we're working with that has the promise to completely shift out the power and energy frontier as our QSE-5, while eliminating as manufactured one of the two components. It's a pretty amazing thing, and we remain excited, and as we've talked about, that's just the start of what our technology platform promises.

Ben Kallo (Senior Research Analyst)

Thank you, guys.

Operator (participant)

Once again, ladies and gentlemen, if you have a question, it is star one on your telephone keypad. Your next question comes from the line of Jordan Levy with Truist Securities. Your line is open.

Henry Roberts (Equity Research Associate)

Hi, team. This is Henry on for Jordan. I just wanna firstly touch on the CapEx savings you all have, have realized so far and expect to realize by the end of the year. Just wanna touch on, I guess, any color you can add around some of the different puts and takes there. With that material cost kinda coming down, more efficient installation through processes, and are there any learnings you guys are gonna take or can take into 2024 and beyond?

Kevin Hettrich (CFO)

Good question. Philosophically, we think about this in terms of big projects and small projects. We regularly get together as a team and think through things that we can do differently or smarter to save CapEx. It's the same as is true with OpEx. And then also, I think the whole company is rallied around the idea of spending more smartly and more effectively. And we also encourage and then publicly celebrate ideas that folks bring forward that we then put into actions. And then when you break it down, it's really that one third of savings that I referenced in my script, is actually broken down into a lot of smaller projects. That's definitely credit to the broader company for realizing.

I think it's also important as we transition from a product development company to one of manufacturing, that that has to be in our very DNA.

Henry Roberts (Equity Research Associate)

Awesome. That's great to hear. And then just a quick follow-up on some of the recent graphite export news out of China. I'm just wondering if you guys are seeing at all any a boost in interest in your technology with some of these geopolitical risks around battery materials kind of starting to play out a little bit, and do you think this will have a pretty large effect or pretty minimal in the long-term kind of demand for solid state versus some of the other factors like higher, you know, energy density and the performance enhancements?

Jagdeep Singh (Co-Founder, CEO and Chairman)

Henry, a terrific question. From an industry point of view, our design eliminates the graphite anode material from the cell, which has two advantages. As you point out, it eliminates a supply chain bottleneck and associated risks of securing supply in a crowded market. Second, as you also allude to, in eliminating the anode host material, we realize benefits in terms of energy density and charge time. Of course, to do this, you will need a highly stable solid-state separator, which is our core IP.

Henry Roberts (Equity Research Associate)

Thank you, guys.

Operator (participant)

Your next question comes from the line of Chris Snyder with UBS. Your line is open.

Chris Snyder (Executive Director)

Thank you. I wanted to ask on the A0 24-layer prototype cell, and specifically that first chart in the shareholder letter, which shows the test results from a customer battery lab. You know, clearly, really strong results there. But the letter does note that this was the best performing cell. So maybe could you just frame this a little bit more for us, whether it's, you know, kind of was this one cell out of how many? Anything around just the delta between this particular cell and the rest? Was it a big outlier? You know, are they all generally similar? Anyway, just kind of frame that more. Thank you.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Sure. Happy to do that. First of all, as we've said many times, in on earnings calls this year, we have work to do on reliability. So, you know, that's a key area that we're focused on to make the cells more and more reliable, so every cell works as well as the best cell. Having said that, though, with the caveat about reliability, the capacity retention curve that you're seeing here is actually very similar to what we see for most of the cells that we've shipped. In other words, the slope of this curve is really very similar across the cells.

And what this cell shows is that, when we make the cells with a sufficiently low level of defectivity, we end up with a really, as you point out, remarkable level of performance. Because 95% capacity retention at 1,000 cycles, to our knowledge, is unheard of for a lithium metal cell, whether solid or liquid. And as you point out, this test was run in our automotive OEM partner's lab, right? So it's their test, using their equipment, using their, you know, test protocols. And we're just really excited that it. This demonstrates. This is really the purpose, as you know, of the A sample, is to demonstrate the capability of the core technology.

And then, of course, when you get to B sample, that's when you have to get to things like, like, you know, implementing that sample or that capability with production processes. And that's when the reliability and so on become more important factors. So the short answer to your question is, the capacity retention curve that we're showing here is very similar to what we see across the board. We do have work to do on reliability to make sure every cell goes the distance. But in terms of the overall behavior, we're really excited by this result. It shows the inherent capability, in our view, of what a lithium metal zero anode design is capable of.

Chris Snyder (Executive Director)

Yeah, no, no, happy to hear that and really appreciate all that color. You know, maybe for my second question, you know, I want to ask on consumer electronics. You know, you know, at QuantumScape historically, you guys have been focused more on the auto market. You know, this year you've talked more about, you know, consumer electronics opportunities. The letter talked about a technology evaluation agreement with a leading electronics player. So I guess my question is, you know, do you think the company's first commercial product that generates revenue is more likely to be in auto or consumer electronics? Thank you.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Yeah, no, thanks for the question and the opportunity to clarify this. First of all, I want to be crystal clear, right? Our focus has been and continues to be and remains automotive. That is our, you know, primary focus. That is the space within which this initial launch customer that we've been talking about is in, and those are the partnerships that we are working very closely with. We talk about consumer, however, because we believe what we have is a technology platform.

We're getting a lot of interest from a lot of different sectors, and, you know, we believe it behooves us, we almost owe it to our investors to explore all those options, keep them, you know, in the running. But, you know, we don't in any way intend to let that distract us from our primary focus, which is of course, automotive. There are several reasons for this. One, of course, is the fact that, you know, if you get too defocused, then you can end up in a situation where you do nothing well. We'd rather do one thing and do it really well. But the other is that sector, we think is by far the largest sector in terms of size and growth potential.

So, you know, the way I would summarize it is that our focus remains unchanged on the automotive space is our primary market. However, we've said before that we have a, I think we called it a single track, dual purpose design. What we mean by that is the same product, you know, in this form factor, we think has relevance to not only automotive but also consumer. And so, you know, we, by continuing down that single track, we can serve both purposes up to a point, at which point we'll have to, you know, obviously, if we're building an actual consumer product, we'll have to make some modifications.

But for the time being, we see no distraction, and we continue to focus on automotive while working with some of the consumer partners as well.

Ben Kallo (Senior Research Analyst)

Thank you, Jagdeep. Appreciate that.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Of course.

Operator (participant)

Your next question comes from the line of Gabe Daoud with TD Cowen. Your line is open.

Gabe Daoud Jr. (Managing Director and Senior Equity Research Analyst)

Hey, Jagdeep, Kevin, and team, thanks for taking my questions. I was hoping we could maybe just go back to that first chart that Chris noted in the shareholder letter. I guess I'd just be curious as to why the prospective launch customer ran the test out of C/3, C/2 charge discharge. Just kind of curious why they wouldn't run, like, a 1C.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Yeah, so it's a good question. Obviously, they ran it at C/3, C/2, because that's the test that they wanted to run. You know, we, as you know, for many of our tests, we report 1C, 1C. We do that for two reasons. One is 1C, 1C is even more aggressive, because, you know, it charges and discharges the entire battery in an hour. So, it's gonna be hard to discharge an actual battery in a car in an hour. You'd have to literally run down, you know, 300 miles of charge or more in one hour, which is hard to do. And in terms of charging up the battery, one-hour charge is typically considered to be a supercharge level of charging.

Most automotive OEMs, most EVs are not charged on a supercharger for every single charge. We do it that way because, A, we think our technology is capable of it, and B, it allows us to collect data much more quickly, so we can have a faster cycle time, which of course, as you know, is key to learning and improving and continuing to execute. Having said that, from a customer standpoint, C/3 may in fact be more typical of what a typical OEM sees for a charge rate. It's a three-hour charge, so if you're plugging in your car into your garage overnight, you know, it might even be longer than that, but that's kind of what they.

You know, I can't speak for the customer, but apparently, that's what they've standardized on, along with a C/2 discharge. So what we're doing here, again, is simply reporting data that was provided to us by this automotive OEM customer. They get to decide the test conditions under which they run, and that's why we reported this. What we think is notable is just the, you know, the capacity retention that we see here with a 24-layer cell is really remarkable. And we mention this because, you know, as you know, when we went public a few years ago, one of the questions some people had was, "Great, you guys have shown some fantastic data at a single-layer cell level.

Can you replicate this in multilayer cells?" And what this data demonstrates to us is that not only can we do this in multilayer cells, in this case, 24-layer cells, but that 24-layer cell is, of course, the same layer count that we're targeting for our first commercial product, QSE-5. And at that 24-layer level, cell level, we're seeing what we believe is industry-leading performance in terms of capacity retention compared to any other lithium metal cell that we've seen. So we think it's an important data point, and we thought it was worth sharing with investors, especially because it was generated, you know, in a customer's lab by the customer using their own test protocols and their own test conditions.

Gabe Daoud Jr. (Managing Director and Senior Equity Research Analyst)

Definitely makes sense. Thanks, Jagdeep, for all the, for the clarification and color. And I guess just a quick follow-up, you noted the, the layer count, and obviously, a goal this year is just the higher cathode loading. Just curious, I think last quarter you guys showed a, a higher cathode loading cell that was maybe a couple layers. So I was curious if there's any update around that performance, and cycle life, and capacity retention, and I guess when, when can we expect to see some data, with the two combined, meaning, you know, higher layer count with the, with the higher cathode loading? Thanks, guys.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Yeah, that, that's a great question, and that's exactly the task that we're currently focused on, is to take this 24-layer cell that we showed, that we shipped last year, the data from which we were showing in this letter, add to it the higher loading cathode, add to it the more efficient packaging, as I mentioned, the, you know, thinner adhesive layers, narrow margins at the edges, thinner current collectors, add to it some improvements we're making to reliability, and then that becomes our QSE-5. So, the, to answer the question of when we expect to have that is next year sometime, in 2024.

I can say that, you know, in general, the testing results from the higher loading cathodes are similar to what we've seen before, which is basically, we have work to do on reliability, but the overall behavior outside of that, in terms of capacity, retention, and fast charge, is quite good. In fact, I think we published fast charge results in the last earnings letters, so the raw data is there for you to look at. But the basic idea is, in 2024, we plan to basically combine this 24-layer cell with the higher loading cathode, the more efficient packaging, and the improvements to reliability that we're currently putting in into our process.

Kevin Hettrich (CFO)

Yeah, and Jagdeep, just-

Jagdeep Singh (Co-Founder, CEO and Chairman)

Understood.

Kevin Hettrich (CFO)

We did, we did publish fast charge data in the Q2 letter, and then also it is, it is more capital efficient to, to do development work on as small of a layer count as possible. So that's just another example of us being as, effective and prudent with capital as possible.

Gabe Daoud Jr. (Managing Director and Senior Equity Research Analyst)

Got it. Thanks for that, Kevin. Thank you, guys.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Yeah, good question, Gabe.

Operator (participant)

There are no further questions at this time. I will turn the call to Jagdeep for closing remarks.

Jagdeep Singh (Co-Founder, CEO and Chairman)

Okay, with that, I'd like to thank you all for joining us. I'd also like to thank our team for their excellent work this quarter, and of course, thank our shareholders for their continuing support of our mission. I look forward to sharing more as we continue ahead.

Operator (participant)

This concludes today's conference call. Thank you for joining. You may now disconnect your line.