Participants

John Saager; Vice President, Capital Markets and FP&A; QuantumScape Battery Inc

Siva Sivaram; President, Chief Executive Officer, Director; QuantumScape Battery Inc

Kevin Hettrich; Chief Financial Officer; QuantumScape Battery Inc

Doug Dutton; Analyst; Evercore ISI

Jordan Levy; Analyst; Truist Securities

Mark Shooter; Analyst; William Blair

Ben Kallo; Analyst; Robert W. Baird & Co., Inc.

Presentation

Operator

Good morning. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the QuantumScape Corp's second quarter 2024 earnings call. (Operator Instructions)
I will now turn the call over to John Saager, QuantumScape's Vice President of Capital Markets and FP&A. John, you may begin your conference.

John Saager

Thank you, operator. Good afternoon, and thank you to everyone for joining QuantumScape's second quarter 2024 earnings call. To supplement today's discussion, please go to our IR website at ir.quantumscape.com to view our shareholder letter.
Before we begin, I want to call your attention to the Safe Harbor provision for forward-looking statement 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 in 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 shareholder letter, Form 10-K, and other SEC filings, including uncertainties posed by the [that's built into the game] future outcome.
Joining us today will be QuantumScape's CEO, Dr. Siva Sivaram; and our CFO, Kevin Hettrich. With that, I'd like to turn the call over to Siva.

Siva Sivaram

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

Kevin Hettrich

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

Siva Sivaram

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

Question and Answer Session

John Saager

Thanks, Siva. We'll begin today's Q&A portion with a few questions we've received from investors or that I believe investors would be interested in. Siva, why is the PowerCo deal so significant for QuantumScape?

Siva Sivaram

John, in my mind, there are four powerful reasons why this deal is so important for us. First, this demonstrates the value we have created for our customers and shareholders to have a solid stability in other platform. Second, by combining our unique technology with the global capabilities of the Volkswagen Group, we can get our technology to gigawatt-hour scale and into series-production vehicles as rapidly as possible.
Third, this deal is non-exclusive, and it provides a template for future deals with other customers. And lastly, the capital-light arrangement that in the first and foremost, efficient allocation of our business, thanks for having 0.057 mentioned the capital-light results from most efficient allocation of [all of its goods].

John Saager

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

Kevin Hettrich

I'm going to steal a while to talk PowerCo and QuantumScape to focus on our respective strength. Benefits of the licensing model for us include increased operating leverage, a reduction in forecast capital requirements, and an ability to utilize our partners' balance sheets.
Additionally, an exciting benefit is that the potential scale of this deal is roughly four times the size of the prior JV. The licensing model creates value for both parties to start with differentiated technology. Our QSE-5 technology and its targeted benefits for safety, energy density, and power, we believe achieved that strong performance differentiation and creates an opportunity for both QuantumScape and PowerCo on an excellent financial return.
In the near term, one of the benefits we discussed from our letter, it will help extend our cash runway by two months relative to targets.

John Saager

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

Kevin Hettrich

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

John Saager

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

Siva Sivaram

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

John Saager

And my final question on the collaboration of IP JV. What does it mean from an intellectual property perspective?

Siva Sivaram

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

John Saager

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

Operator

(Operator Instructions) Doug Dutton, Evercore.

Doug Dutton

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

Siva Sivaram

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

Doug Dutton

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

Siva Sivaram

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

Doug Dutton

Awesome. Thanks, everyone.

Operator

Joe Spak, UBS.

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

Kevin Hettrich

Hi, Gabriel. Thank you for the question. I have to say that things are important inputs into your modeling going into the future. We'll just point you back to the contract that we attached to our 8-K and Article III of the IP licensing agreement. It does have detail on the royalty rate and there's a section on outperformance sharing. And unfortunately, I won't be going beyond the detail of what we already provided in that contract on this call.

Understandable. Appreciate it.

Kevin Hettrich

And then, Gabriel, just one thing to add is just that not providing very specific detail in the contract is customary as it is in the best interest of both parties, not to disadvantage ourselves and further negotiation, and especially for QuantumScape as this deal could be a template for future such licensing deals. And it's also in our shareholders' interest.

Now that makes sense. I appreciate it. Just to clarify on the $130 million of prepaid royalties, do you get that immediately now it's implemented into your cash runway forecast? Or are you unable to access it until the technical requirements are met?

Kevin Hettrich

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

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

Kevin Hettrich

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

Great. Thanks. I'll pass along.

Operator

Jordan Levy, Truist Securities.

Jordan Levy

Afternoon, all, and congratulations again on the deal. Maybe we've kind of touched around this, but if you could just help us understand a bit more how the work with the joint team with PowerCo and the core QuantumScape's teamwork will differ from what you're already doing on Raptor and Cobra. I guess, not to get through into the details, I'm just not sure I understand the difference between the collaboration work and the work being done as you push manufacturing or commercialization.

Siva Sivaram

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

Kevin Hettrich

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

Jordan Levy

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

Siva Sivaram

Yeah. So before I go too far, I want to make sure that safety testing is never complete. We will continue to test, and these were the prototype samples, and we need to do the same thing with final product, and we need to collect a lot more data. Having said that, we have a technology that because of the ceramic separator and the solid-state nature of our technology, we are inherently safer.
What this does is if you are trying to design a pack or a module, additional heat and internal separation precautions that you need to take, you have advantages with our inherently safer device.
Now you think of an application. I'm just using a fairly generic application as a long-haul truck. A long-haul truck carries more than 1 megawatt-hour of batteries in it. Currently making sure that megawatt-hour of trucks can have the standards that you want it to have is a very onerous technical problem. The additional safety precautions, the additional engineering, the additional safety technology that needs to be added.
We now make that imminently possible. That's the kind of opportunity we are talking about. Of course, in the existing applications, whether it is an automotive or consumer electronics, you can inherently see the value of better safety that it brings.

Jordan Levy

Absolutely. Appreciate that.

Operator

Jed Dorsheimer, William Blair.

Mark Shooter

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

Siva Sivaram

Mark, I believe the reference was specifically to the Alpha-2 shipments, which went to a number of customers, including those in automotive and consumer electronics sectors. As you can imagine, a differentiated technology that has advantages and safety, power and energy density is very interesting to any application that has a battery in it. That's true of -- consumer that's true, certainly have automotive. We are very much a automotive-focused company.
You see that just in the sheer number with this release and the deep partnership with VW and PowerCo. That is where our focus lies. That said, we do receive interest from those parties, and we do continue to sample into them as we think it creates optionality. And on this call, there's nothing to add in terms of the timing of revenue.

Mark Shooter

Understood. Thanks for the color. And just seeing with all the AI apps coming out and being pushed on device, I can see that the battery demand on device could have a pretty big pull through for most customers. So looking forward to any update in the future.
One last one is I know you are focused on the EVs. But in a similar vein, EVTOL company, the electric vehicle -- or sorry, the vertical landing and takeoff, do you see that as a potential as well? Are you talking to those customers?

Siva Sivaram

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

Kevin Hettrich

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

Mark Shooter

Got it. Thank you for the -- thanks for the color.

Operator

Ben Kallo, Baird.

Ben Kallo

Hey, good evening, guys. Congratulations on the PowerCo deal. Maybe just -- you touched on trucks and do you, guys -- have you, guys, tested with really trucks? Or is that in the plans or in discussions? I think that was the first time I ever heard you guys say trucks.

Siva Sivaram

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

Ben Kallo

Great. And then for the remainder of your customers, do you think that this -- or has this changed your discussions with them and their desire to move faster? Or is it kind of a wait-and-see approach? I think you touched on this a little bit earlier. And then maybe what about any new customers approaching you or new potential OEMs approaching you?

Siva Sivaram

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

Ben Kallo

Okay. Thank you very much.

Operator

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

Siva Sivaram

Thank you for -- with that, I'd like to thank you all for joining us today. We look forward to sharing more on our progress in the coming months. Thank you.

Operator

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