Quantumscape Corp (QS) 2021 Q4 法說會逐字稿

Good day, and welcome to QuantumScape's Fourth Quarter and Full Year 2021 Earnings Call. John Saager, QuantumScape's Head of Investor Relations, you may begin your conference.

Thanks, operator. Good afternoon, and thank you to everyone for joining QuantumScape's Fourth Quarter and Full Year 2021 Earnings Conference Call. To supplement today's discussion, please go to our IR website at ir.quantumscape.com to view our shareholder letter.

Before we begin, I want to call your attention to the safe harbor provision for forward-looking statements that is posed (sic) [posted] on our website and as part of our quarterly update. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results [and] financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements for the reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed by the difficulty in predicting future 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.

Thank you, John. The past quarter marked the close of our first full year as a public company, and we're proud to say that it was a successful one. At the beginning of 2021, we set out 4 key goals for ourselves. First, those single-layer cells using separators with commercially relevant thickness, the technical milestone set jointly with Volkswagen. Next 2 were to demonstrate that our single-layer cells can be scaled up to 4 and then 10-layer cells without adversely impacting fundamental cycling behavior. The last goal was to secure space and begin build-out of our QS-0 pre-pilot production facility.

Thanks to the dedicated efforts of our team, we completed all 4 of these goals on schedule. We achieved our final 10-layer milestone in November last year. And today, we can report that additional 10-layer cells have reached 800 cycles, replicating the long-term cycling performance we first demonstrated in single-layer cells a little over a year ago. Our technical development continues to progress rapidly.

Today, we're excited to announce results from our first 16-layer cells at the amp-hour scale. While we generally do not expect first prototypes to demonstrate cycling results that match more mature designs, we were pleased to note that over early cycles, the very first 16-layer cell we put on our cycle life test showed energy retention behavior substantially similar to that of our single 4- and 10-layer cells, providing a solid basis upon which we expect to rapidly iterate and improve in the coming weeks and months. We're also excited to share new data on single-layer cells. Single-layer data is important, because it indicates the level of performance that can be achieved in a well-designed multilayer cell.

At the single-layer level, we have now shown full area cells operating with 0 externally applied pressure, reaching 800 cycles under what we consider to be gold standard testing conditions: 1 hour charge, room temperature, and 100% depth of discharge simultaneously. To our knowledge, this represents a world first for any lithium-metal battery that allows us to not only build more efficient packs for the automotive application, but also opens up sectors like consumer electronics, which don't have the physical room for pressure application apparatus.

On the customer front, we recently announced a new strategic relationship with Fluence, a global leader in stationary energy storage. We believe this demonstrates that our lithium metal technology presents a compelling value proposition in energy storage applications, which potentially represents a multi-hundred-billion-dollar opportunity. Over the course of 2021, we also announced 2 customer sampling agreements, one with a global top 10 automaker and the other with an established global luxury OEM.

Including our long-standing relationship with Volkswagen, we now have agreements with customers collectively representing more than 15% of global automotive sales in 2020. We believe this continued customer interest reflects widespread demand for a better battery. To meet this demand, we are working on ramping up our production capabilities, and our key milestones for 2022 are focused on executing the most important aspects of our scale.

Our first goal for 2022 is to demonstrate our proprietary cell format. Our ceramic solid-electrolyte separator enables the use of a lithium-metal anode [in the cell] in a cell that is anode-free as manufactured. This architecture potentially unlocks a host of benefits, such as improvements in energy density, charging speed, cycle life, safety and costs. However, any lithium-metal cell design must be able to deliver these benefits while also accounting for the unique challenges of lithium metal, such as increased volume expansion compared to conventional lithium-ion batteries. The design must also be capable of being manufactured rapidly, cost-effectively, and at scale using automated processes.

This year, we plan to demonstrate our proprietary cell format in preparation of large-scale customer sampling and eventually commercial production. We look forward to sharing more details on this new format soon. Our second goal for the year is to deliver A sample prototype cells to at least 1 customer. We plan to utilize our proprietary cell format with A sample, which represents a major step towards defining our commercial products.

Note that since every customer has somewhat different requirements, the precise specifications of an A sample are likely to be varied between customers and across various applications. These A samples will be produced on our Phase 2 engineering line and delivered to customers for validation and testing. The Phase 2 engineering line is being located at our new QS campus and represents an expansion of our original Phase 1 engineering line that is located in our current San Jose R&D facility.

Our third goal is to increase film starts to a rate of 8,000 per week. Film starts are an important gauge of our manufacturing capacity. And thus far one of the bottlenecks to production scale has been film supply, due to considerable lead times for much of the necessary tooling. We expect this constraint to ease this year as production begins on our Phase 2 engineering line. Not only will this help serve demand from customers for A sample cells, but it will also be an important demonstration of the scalability of our manufacturing process. Our last goal for the year is to take delivery of equipment for our QS-0 line and remain on track for the start of pre-pilot production in 2023.

We plan to produce candidate B samples for delivery to customers next year, and our investments this year will support the build-out of QS-0 and the surrounding QS campus. If we complete these 4 goals, 2022 will represent a significant step forward on our path to bring our solid-state lithium-metal battery technology into production. I'd like to close by taking a look at the strategic picture. We believe there are 4 key elements to the QuantumScape investment thesis: one, battery electric vehicles will replace combustion engine vehicles; two, the anode-free lithium-metal technology we have demonstrated can enable compelling improvements over current lithium-ion batteries; three, we can scale up ourselves to many layers; and four, we can mass manufacture ourselves and achieve competitive economics.

So is the transition to battery-electric vehicles happening? Clearly the answer is yes. And at this point, it appears unstoppable. Major automakers have seen double or even triple-digit growth in year-over-year BEV sales, and total planned investment in BEV productions over the next decade amounts to hundreds of billions of dollars.

The transition now seems inevitable. Second, does our next-generation technology deliver compelling benefits over current lithium-ion batteries? Again, we believe the answer is a clear yes. Using our single-layer platform, we've shown long cycle life under automotive development test conditions, impressive fast-charging capability, and an anode-free, solid-state design that has the potential to provide improvements to energy density and safety while also offering the potential for cost reduction.

Above all, the level of interest we've seen from customers has persuaded us that there is widespread demand for a better battery. That brings us to the third question. Can these single-layer building blocks be stacked up into a commercially relevant cell? When it comes to multi-layering, we believe that our success over the past year, moving from 1 layer to 4 to 10 to now 16 shows that we have, in fact, successfully been able to deliver our single-layer building blocks into multi-layer amp-hour scale cells. We believe delivery of our A sample later this year will check the box on this premise.

That leaves the final question. Can we mass produce these multi-layer cells while also achieving competitive economics? We believe this question will be answered as we execute on our scale-up milestones. In 2022, we intend to show our production-intent cell format and deliver A samples. In 2023, we plan to produce candidate B samples and are targeting commercialization in the 2024-2025 time frame. As we execute on these milestones, we believe this final question will also be addressed, completing all 4 elements of our basic thesis. Our mission as a company is to build a better battery, to accelerate adoption of electric vehicles around the world, to help avert the worst effects of climate change and to create extraordinary value for customers and shareholders alike. These goals are admittedly extremely ambitious. However, if we are as successful in 2022 as we were in 2021, we believe we will have demonstrated that the goals we have set for ourselves are in fact achievable. We will continue to work to turn these ambitions into reality. Kevin?

Thank you, Jagdeep. In the fourth quarter, our operating expenses were $67 million. Excluding stock-based compensation, operating expenses were $51 million. This level of spend was in line with our expectations entering the quarter. For full year 2021, operating expenses were $215 million, including stock-based compensation and depreciation. Cash operating expenses for full year 2021 were $152 million. For 2022, we expect cash operating expenses to be in the range of $225 million to $275 million as we increase sale volumes, scale our manufacturing capabilities and hire additional headcount to support this growth.

CapEx in the fourth quarter of 2021 was approximately $45 million. For full year 2021, CapEx was approximately $127 million, below the lower range of guidance of $135 million due to a shift in payment timing from Q4 '21 into 2022. The change in payment timing does not impact scale-up timelines. QS-0 is currently on schedule. Our 2022 CapEx plan makes significant investments into cell development and scalable production.

Continuous flow processes featuring increasing levels of automation, high-throughput metrology systems and scalable digital architecture. These investments help establish the mass manufacturing blueprint for our QS-1 joint venture with Volkswagen [in] subsequent facilities. We expect total 2022 CapEx to be in the range of $325 million to $375 million. Of this total, approximately $215 million is planned for QS-0 in our expanded QS-0 campus. The primary QS-0 building is already in an advanced stage of construction. We'll begin construction on the additional QS-0 campus space in the middle of 2022. Approximately $85 million will go toward our Phase 2 engineering line and approximately $52 million will flow into our Phase 1 engineering line and additional projects, including our R&D center in Japan.

In line with previous guidance, 2021 and 2022 represent the substantial majority of an investment into our engineering and QS-0 lines. In 2023, we expect capital spending related to our engineering in QS-0 lines to decline significantly. We target that by the end of 2022, our engineering line will have achieved its goal of producing A samples, and we will have received the majority of equipment for QS-0, tracking to our 2023 goal of cell sampling from that line for use in test cars. We expect CapEx investment during 2022 to be nonlinear. We anticipate Q1 2022 CapEx to be in the range of $30 million to $60 million, with higher spending coming in Q2 and Q3 as the bulk of payments for the QS-0 facility and tooling occurs. We'll continue to update our CapEx guidance throughout the year. We expect OpEx to grow steadily during 2022. In 2023, we expect OpEx to grow modestly from 2022 levels as we slow our headcount growth rate and reallocate resources from development to manufacturing. With respect to cash, we spent $89 million on operations and CapEx in the fourth quarter and $255 million in full year 2021.

Based on these estimates, we expect to enter 2023 with over $800 million in liquidity, which we believe will be sufficient to fund cash OpEx through initial QS-1 setup, final residual investment in QS-0 and CapEx to support the initial setup of the QS-1 production facilities, the joint venture for cell manufacturing as well as the facility to supply separators, which we will retain full ownership of. Our GAAP net loss for the quarter was $67 million and for the year was $46 million, including the impact of $169 million in noncash fair value adjustment of the assumed common stock warrants.

Excluding this noncash adjustment, the net loss for 2021 was approximately $215 million, in line with our expectations. In Q3 '21, we completed the redemption of all outstanding warrants associated with the business combination. Consequently, there will not be any incremental fair value adjustments related to these warrants in future periods. We're excited to have accomplished all 4 milestones we had set out to achieve in 2021, and we look forward to the ambitious tasks ahead this year. We'd like to thank our investors for supporting our mission to commercialize our solid-state lithium-metal batteries and thereby accelerate the mass market adoption of electric vehicles.

With that, I'll pass it over to you, John. John?

Thanks, Kevin. We'll begin today's Q&A portion with a few questions we received from investors over the Say app and in our IR inbox.

We had a couple of questions come in around timing of production. So I'll try to summarize them here. First, can you update investors on the status of the manufacturing facilities? Specifically, where are the facilities today? Where are you going to be expanding to? And when can we expect them to be ready?

So our plan started with our Phase 1 engineering line at our R&D facility in San Jose. This facility has been used to make all the cells we have delivered to customers to date, including single, 4 and 10 layer cells. We have a new Phase 2 engineering line that is being built on our new QS campus, and this will be where we produce our A sample later this year. We plan to follow that up with candidate B samples from our QS-0 pre-pilot line [for] 2023.

The QS-0 line is also located on our QS campus, and that leads to our QS-1 production facility which we are targeting to be operational in the 2024-2025 time frame.

Okay. Our second question, also from Say app: when can investors expect to see a prototype cell? And how far are you into that process?

Well, we've already sampled single, 4- and 10- layer cells with our customers. The A-sample prototype, which is targeted to have several dozen layers, and will be familiar to investors who follow the automotive space as the sample that demonstrates the core functionality of the cells, is targeted for this year. We will follow that up with the candidate B sample, which is generally defined as the sample made using production processes off our QS-0 pre-pilot production lines targeted for 2023.

Okay. Great. Some investors are concerned around IP protection, specifically the risk that somebody will reverse engineer our technology and reproduce our batteries. Could you talk a little bit about QuantumScape's approach to IP protection, and how you get comfortable with the risk of patent infringement?

Sure. So we have a 2-pronged IP strategy. The first prong is through our patent portfolio of over 200 patents and patent applications. We generally patent those innovations that can be discovered by a competitor by examining our cells, for example optically or chemically. Because these innovations can be directly observed, we're comfortable publicly disclosing them via patent filings. However, the second prong is our portfolio of over 100 trade secrets, which are those innovations which cannot directly be observed in our cells, for example, process conditions and recipes, intermediate materials such as solvents and gases, of which no trace is left in the final product and the like.

For someone to reverse engineer our technology, they would have to go through a lengthy and extensive process of trial and error in a multidimensional parameter space to try and arrive at the correct answers. We believe this dual-track approach creates a strong moat competitors will have to work hard to overcome.

Okay. Two more questions from me. First for Kevin. You said that we have enough cash to get into initial setup of QS-1. Given the level of spend this year, can you walk investors through the liquidity situation until you get into initial production in the '24-'25 time frame?

Thank you for the question, John. It's a good one, and I'd be happy to walk you through it. We entered 2022 with approximately $1.46 billion in liquidity. We plan to spend approximately $250 million on cash OpEx and approximately $350 million on CapEx this year, representing a substantial investment into cell development, process development and our mass manufacturing blueprint.

This spending supports the 4 milestones we set out for ourselves this year, and funds the majority of outstanding CapEx for our QS-0 line and QS 0 campus. We subsequently plan to enter 2023 with over $800 million of liquidity; sufficient funding, we believe, to achieve 4 things: fund cash OpEx, inclusive of modest growth after 2022 through initial QS-1 setup, pay for residual CapEx for our engineering QS-0 lines and QS-0 campus, fund CapEx for the initial phase of our QS-1 joint venture for cell assembly. And finally, fund CapEx for the initial phase QS-1 separator facility, which we retain full ownership of.

Okay. Great. My final question is for Jagdeep. You said in the letter that the 16-layer cells are on the amp-hour scale. Why is that significant? And can you contextualize that cell size versus other batteries?

Yes. Amp hours are a measure of how much charge is stored by the battery.

And by amp-hour scale, we mean total capacity is over an amp hour. To put this in context, some of today's leading EVs' battery cells, 18650 and 2170 cells, are in the range of single-digit amp hours.

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

(Operator Instructions) We have the first question on the phone lines from José Asumendi from JPMorgan.

It's José at JPMorgan [and I even could]. Thanks for the very detailed comments and outlook for evolving technology and financials. So just a couple of questions, please.

Jagdeep, can you comment a little bit around this A sample? What do you need to show from a technical perspective or from a sort of, technical milestones you need to deliver in the short term to deliver these A samples? Second, when you look at sort of 2021, what do you think went better than your expectations? What do you think took a bit longer to solve versus the initial plan? Can you give us that perspective? And Kevin, can you speak a little bit around hiring? And when do you think hiring will peak from an R&D dedicated personnel perspective?

Yes, Jose, thanks for the question. So this is Jagdeep. I'll take the first couple and then turn it over to Kevin.

So the A sample is -- in the automotive space is well understood to be a sample that demonstrates the core or essential functionality of the product. That's obviously then followed up with a B sample, and typically a B sample refers to a product that not only has the core functionality but also is made using production processes.

And then finally is the C sample, typically, and the C sample means it has the core functionality. It's made using production processes, but it's actually manufactured on the actual tooling on which you're going to do the production. So for our A sample then, it needs to demonstrate the core functionality. And the core functionality, as we see it and our customers see it, really has to do with the electrical performance of the cell. So that means things like the charge and discharge rates, the cycle life and so on.

So those are the things that we're focused on getting done in the C sample. Once we have that, we think that will be a powerful demonstration that we can actually not only achieve the key performance metrics of the cell, but do so in a multi-layer cell with several dozen layers as we've said in the past.

And as I said earlier, in our view, that would check the box on the question of, can we take the single layer demonstrations that we've done, that we've shown many of in the last year or so, and actually deliver those in a multi-layer cell. I think the second question you asked was about 2021. What went better, what went worse than plan.

So that's a good question because, of course, no plan is completely linear and monotonic. You always have things that are ups and things that are downs. I think the things that we're most happy about, of course, is the fact that we hit all of the 4 goals that we've laid out to the Street. So we're happy to start building a track record of execution. We think that, that bodes well for our ability to forecast accurately and then execute to those forecasts. I think the areas that I think were frankly challenging was, 1 is -- one of our key bottlenecks to making progress really is around the volume of the separators that we could produce.

That production volume was dependent on certain tools. We needed bigger tools that we were -- we had ordered from our suppliers, and the lead times associated with those tools just caused us to basically not be able to ramp up production to the extent that we would have liked.

It didn't end up impacting our overall results for the year. We were able to make, as you know, 4-layer cells and then 10-layer cells and then have those cells actually meet what we consider to be the gold standard testing conditions, which, of course, are 1-hour charge and discharge, 800 cycles, room temperature of 25 degrees Celsius, 100% depth of discharge and modest pressure.

It's hard to meet all those conditions simultaneously, and we've set that up for ourselves as our key goals. So we feel good that despite some of those challenges in terms of getting tools in and so on, we were able to make enough cells to hit our goals. So let me turn it over to Kevin for the last question.

Yes. Jose, I believe that related to headcount growth and specifically the R&D portion of it. A few comments on both those points. We ended 2021 with a team over 550 strong. While we haven't given specific headcount growth, you could take the ratio of our 2022 cash OpEx guidance as a ratio of our 2021 actuals and get pretty close.

Most of the hiring, especially this year, has been to the R&D team as we support the second phase of our engineering line towards that 8,000 film start per week target as well as continue that QS-0 line start target next year, notably landing the majority of equipment this year. And in terms of going forward, I would expect that trend to play out even further with even higher percentages going to the R&D team. And as we mentioned in our shareholder letter, we'll look for specific opportunities to shift development resource towards the R&D team as development is increasingly behind us, and the scale-up risk is the dominant focus for the team.

We now have our next question from Chris Snyder of UBS.

So my first question is on scale within the manufacturing process. Can you talk about the benefits of scale? And in that same vein, at what level of output do you think the benefits of scale begin to taper off?

Yes. So again, a good question. So first of all, when we say scale, we are referring to 2 things, obviously. One is scaling up the number of layers in our cells and 2 is scaling up the production capacity. So on the first point, when you start to get -- when you start getting to a few dozen layers, you start achieving diminishing returns relative to the energy density advantage of additional layers.

So the main reason why we want to increase the layer count from 1 to 4 to 10 to now 16 and then to a few dozen layers is because the more layers you have in the cell, the better the ratio of active material to inactive material, and therefore the better the packing efficiency of your cell and the energy density goes up. But that's sort of a diminishing returns curve. As you get higher and higher, you start drowning out the effects of the inactive materials to the point where adding more layers doesn't help you. So once you have 2 dozen layers you've kind of gotten most of the benefit of that aspect of scale.

On the manufacturing side, clearly you need to get a certain level of scale to get the economics to be compelling. We do believe that our approach has some fundamental economic advantages, the biggest one, of course, being that we don't need an anode. We don't need the anode material. We don't need the anode manufacturing line. Our cells are literally made anode-free. And so the anodes form in situ on the first cycle from the lithium that is already in the cathode. We don't need to buy lithium foil or carbon or silicon or anything.

Now to drive those economic benefits, though, you need an upscale to where you're not operating at too low a scale. We believe that, that scale has certainly achieved in the first full-scale factory that we're planning QS-1, which is targeted to be on the order of 20 gigawatt hours. So we would expect our economics to be compelling at that scale. While we ramp up to that scale, obviously we're going to have the same kind of amortization of fixed costs over low volumes, that over time becomes lower and lower until you get to the right scale. So I would say the 20 gigawatt hour scale or so is when we believe the economics are going to be at scale.

And then I just kind of wanted to follow up on the storage market and applications beyond auto, which the company mentioned in the prepared remarks. For auto, we've grown pretty accustomed to measuring performance, largely in terms of density. Can you talk about what are the most important metrics for the storage market and even maybe consumer electronics, which you guys called out?

Yes. I mean so for storage, we're finding that some of the same themes that resonate with the automotive space are resonating with storage as well. In fact, our understanding is that a lot of the storage guys are actually buying automotive-class batteries today. So for example, something as simple as energy density. One might, at first glance, think that when you're talking about stationary storage that you have unlimited space and don't [really] care about mass. But the reality is that when you're building a 100-megawatt hour plant, that's a lot of space.

And so energy density, if you can have a battery that's 50% more energy dense than conventional, that does translate to real economics. Things like power, so there's a wide range of applications in the stationary storage space. Some are things like frequency regulation, some are things like time shifting of demand. But some of those applications do need high power. So the power capabilities are important. Obviously, economics are important, safety. So all those metrics really, we're finding do resonate with the stationary storage space.

And that's why we think Fluence is still interested in partnering with us on longer-term solid-state use in stationary storage applications. Yes, for the consumer as well, and it's the same story there. I mean different applications may weight those benefits differently. But typically, they all benefit from a battery that has higher density, faster charge times, safer operations, better economics, longer cycle life.

And energy density in particular is very important for consumer goods, because if you have a consumer device like a phone or a tablet or a laptop, where something like 1/2 to 2/3 of the volume may be battery, then the designers of that device place a lot of value on a battery that has the same amount of energy in a smaller space, because they could use that space for additional functionality. So I think the short answer is we're finding the same basic set of functionalities, set of features that we offer: energy density, power density, safety, cycle life cost are resonating across a broader set of applications.

Makes sense. Appreciate all of that.

We now have Gabe Daoud of Cowen.

I was hoping we can maybe start with the separator and the film targets that you've laid out from a manufacturing standpoint. Maybe first, just on the update on the 10-layer cells. You'd mentioned there are some newer cells that were put on test that had a commercially relevant separator area of 66x81. So I guess I was curious just how that's evolved from prior tests? And if the thickness is still in the tens of microns that you've mentioned previously?

Gabe, yes. So the thickness, as we've said before, is in the low tens of microns and that remains the case. The physical -- the XY dimensions, we did point out that some of those cells are in slightly different dimensions. They're all in the same general form factor that we call commercially relevant and the differences have to do with -- as we are evolving our formatting -- the actual cell package format, we're slightly tweaking the dimensions to optimize that format. But essentially, those results were in the same form factor. Was there another question you asked besides -- and then you asked about separator films...

Yes, thanks, Jagdeep. That's helpful.

Yes, yes. Yes, I guess I was just curious if you could talk a little bit about how -- go ahead, Jagdeep.

Yes. So that's a really important question, I'm glad you brought it up. So one of the things -- I mentioned earlier that scale-up involves 2 aspects. One is scaling up the layer count ourselves, which really is -- its primary focus is to increase energy density of the cells because it improves the ratio of active to inactive material. And the second aspect of that scale-up is producing more cells. So we can provide more cells to customers and actually make progress towards our commercialization goals.

Both of those scale-up aspects are driven really by one underlying metric, which is film starts. How many -- and by film we, of course, mean our solid-state ceramic separator electrolyte, we call it film, it's a shorthand notation internally. And if you look at film starts, that gives you a sense for how many -- what volume of films we are able to produce in manufacturing internally, which will then drive our -- both our layer counts increases as well as our delivery of cells to customers. So as we point out in the shareholder letter, we ended the year last year with something like between 1,000 and 2,000 starts per week typically. And our target for the end of the year is more like something like 8,000 starts per week. So that's a substantial increase in the number of film starts per week.

That increase is driven really by the arrival of new tools. As you know, we are working on -- we've been working on continuous flow processing tools. So these are tools that are not batch oven-like, but are more like just a conveyor belt running these films continuously. Those new tools are really what's behind that increase in the film starts. And the increased film starts that will play a key role in allowing us to continue our progress on layer count increases as well as volume -- production volume increases of the cells to provide to our customers.

Jagdeep, that's helpful. And then so for QS-0, the efficiency needs to increase another 4x or so. So you kind of have to get to about 32,000 per week or so for QS-0 to supply the -- I think it was 200,000 cells coming off of that line?

Gabe, I can take that one. The shareholder reference -- the shareholder letter reference talked about greater than 4x film start per unit of CapEx, with CapEx being equipment plus tooling. And that was specific to the second phase engineering line relative to the first phase engineering line. Like however, as you note, we do expect continued improvement going to the QS-0 line, and it would be in that same ZIP code of improved efficiency.

Thanks, Kevin. And then just 1 final one for me, guys. You'd mentioned unique challenges of lithium metals, such as increased volume expansion. Is there anything you could talk to in terms of maybe a percentage expansion on the cells after a certain number of cycles, and has it been an issue? And where do you have to get to if it has been an issue?

Yes. So to clarify, when we say expansion, it's not -- this is not a cumulative expansion that happens over the life of the cell. This is just an expansion and contraction that happens in every cycle. And of course, the reason behind it is relatively intuitively clear. You start out with a cell that has no anode, it's anodeless as manufactured, right? This is what gives us the benefits of [energy density] as well as better economics. But when you charge up the cell, of course lithium has to move from the cathode to the anode and that anode then forms in situ, it becomes a layer of [pure metallic] lithium. That metallic lithium layer has to occupy space. Lithium, obviously, is not [inherently] dense, so it takes up space. And so the whole cell expands by a little bit, right? So each layer probably expands a few tens of microns on [every] cycle and then it shrinks back down to the original size when the lithium goes back into the cathode. And you have that constant expansion and shrinkage of the cell as you cycle. So that what we're referring to in terms of the packaging is that, that's sort of a unique aspect of the behavior of lithium-metal cell.

So if you want to drive the benefits of lithium-metal anodes, which obviously are significant, you have to have a cell-level design that can accommodate that expansion. The expansion is probably on the order of 15% to 20%, roughly speaking, for a cycle, but you need a design that at the cell package level can handle that.

Now we have some really interesting news [on this] to announce in the next -- in the coming weeks and months. So I don't want to steal the thunder on that announcement, but I will say that we're planning on sharing more with our investors on the design of a new package format that can accomplish this, along with accomplish some other goals that we have in terms of overall packaging efficiency.

And the other point I'll say is that the traditional -- there are basically 3 main types of packages that are out there today in the battery space. There's obviously cylindrical cells like the ones used on -- the ones that Panasonic ships, for example, the 18650 and 2170. There's prismatic can cells. And these are rectangular, metallic cans, typically aluminum cans. And the third format is pouch cells. So these are like -- it's a soft material, typically some kind of metallized polymer material that's used [to encase] the cells, and that's a soft kind of packaging.

So what we're talking about doing here is a new type of package. It's a 4th type of package. And again, we'll share a lot more about that in the coming weeks and months. But our team is pretty excited about it because we think it uniquely enables a lithium metal architecture. And then the only other thing I'll say is that, over time, one of the things that we think will make this even easier is, of course, the fact that we've demonstrated that our chemistry can work with very low pressure. And that just makes your whole packaging and module design and the automotive pack level engineering simpler. So all that, we'll share more about in the coming weeks and months.

Awesome. Very interesting. Thanks, Jagdeep.

We now have a question from George Gianarikas from Baird.

So maybe to start off with just QS-0, if that's okay. Just so I can understand -- and please correct me here if I'm wrong because I'm just going back to old notes. I think the original expectation was around $75 million in spending for QS-0. But if I'm understanding it correctly here, it looks -- sounds like it's $215 million. Is that inaccurate in terms of my assumption, maybe it includes the campus? I'm just trying to understand if there's been inflation in some of the tools that you have to order, or if I'm just miscalculating something.

Yes. George, if you can help me with the source of the $75 million. What we did say was in the context of the follow-on, half of the capital would be going towards QS-0. And if you look at where we've come out on that. And if you look at the equipment and facility costs for the line itself, we've been roughly in line with our original expectations. If your question is alluding to kind of where the spend is in '22 relative to expectations where that amount may have gone up.

The other part of your question is correct, that QS-0 wasn't in the original plan. We had a unique opportunity to lease the adjacent buildings to the first building that we've occupied. And what that does is that provides close proximity for the R&D and the manufacturing teams and fosters collaboration between the departments and the functions, I guess [is the] long-term Bay Area campus as additional square footage to QS-0 line to support its execution and add future optionality, extra R&D square footage to support near-term and long-term development. So that will be one of the areas where there was additional spend not contemplated in that time frame. And just to clarify...

That might just have been an old note of mine.

Yes. I'm trying to think internally, but what I can say is that $75 million was never the target number.

Yes, it might have been just one of my old notes. But it's fair to say that these are -- this is a reflection, this increased spending this year, of just enhancing the opportunity, not necessarily of any inflation that you've seen or any cost adjustments based on just the catalog getting more expensive.

Correct. For the QS-0 equipment and facility, that part was roughly in line with our original expectations.

Okay. And then if you could just help me understand the math. You talked about film starts this year, getting those to 8,000. Is there a way to understand exactly how that translates into separators and then cells? Like I'm just trying to figure out like what that means in terms of the production -- the eventual production ramp.

Yes, I can take that one. So we use starts as a metric because that's a relatively objective, clean metric. The separators that come out of the process are going to be a function of both the number of starts and of course, the yield of the process. And the yield is a constantly moving target. We're obviously constantly optimizing it and improving that fraction. So the number of outs will change over the year, but the number of starts is a little more objective and concrete. So we use that as a metric that we track. But basically, this target number of starts is designed to be sufficient for us to meet the goals that we laid out for the year, which, of course, is to deliver A sample cells to customers and making up cells to keep us on track relative to the QS-0 and subsequent B sample engineering work as well.

We now have another question on the line from David Bell of Wolfe Research.

This is David Bell on for Rod Lache. Congrats on the year. I wanted to jump into a couple of questions on the separator manufacturing. Could you walk us through the key differences between the Phase 1 and Phase 2 engineering line? And will Phase 2 incorporate the continuous drawing process? And how similar is that process to what will be used in QS-0?

Yes, there might be 2 areas to compare. One is the size of the continuous flow equipment. As you note, that we have installed a continuous kiln into our Phase 1 engineering line. The one that we'll be installing into the Phase 2 is larger. And the other dimension, as I was alluding to, it will feature higher levels of automation. So these are -- those 2 metrics thematically we need to keep playing out, not only in this process area, but in other process areas as we make progress on process development from our initial phase to subsequent engineering phase to QS-0 and then ultimately to QS-1.

And when it comes to an earlier question which was asked related to long lead time for equipment. Is there still more development work that needs to be done on the QS-0 continuous drawing process equipment before it's ordered?

I think the question is, has the QS-0 long lead time equipment for the separator been ordered?

Yes. That long-lead time equipment has already been ordered.

Okay. And then I just had a quick follow-up on the full -- sorry, go ahead, Jagdeep.

No, go ahead, David, please.

Okay. So I just had a quick question. So you've to date had the 4 collaboration agreements. Could you walk us through a little bit as to what needs to happen within those agreements in order to convert them to supply contracts?

Yes. So it's actually pretty straightforward. We basically are planning on providing those customers with a series of successive generations of cells. So we'll start out with cells on a certain maturity. They'll test those, validate those and if all goes well, we'll then shift them to the next generation of cells and so on. And typically speaking, it's when you get to pass the B sample that you end up with actual supply contracts being negotiated. The B sample really is when there's confidence on the part of the OEMs that not only does the functionality work, but that the processes that are being used are in fact the same ones that will be used in production.

And that is simply a matter of acquiring the tooling that will actually produce those high-volume cells. And typically, we're going to want comfort that -- from the OEM that they're actually going to -- that they're committed when we start ordering super expensive large tools for production -- for production, mass production of the cells.

Now in the case of Volkswagen, obviously, we already have a partnership in place. There is a JV that's already in place that's focused on mass production. That JV actually is QS-1. It's planned for a couple of phases. The first phase being a 1 gigawatt hour phase, the second phase being a 20-gigawatt hour phase. So these are fairly high volumes for battery production [if you take it back] in scale production. But to answer your question, briefly, as we proceed down the path and get to more mature cells, and they get validated, that's when those agreements start changing over to becoming sort of supply contracts.

(Operator Instructions)

Okay. We want to thank everyone for joining our 2021 earnings call, and we look forward to reporting continued progress over the coming quarters. Thank you.

Thank you. This does conclude today's call. Thank you all again for joining. You may now disconnect your line.