QuantumScape Corp (QS) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
On November 25, 2020, Kensington acquired us. The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Kensington was treated as the “acquired” company for financial reporting purposes. Except as otherwise provided herein, our financial statement presentation includes (1) the results of Legacy QuantumScape and its consolidated subsidiaries as our accounting predecessor for periods prior to the completion of the Business Combination, and (2) the results of the Company (including the consolidation of Legacy QuantumScape and its subsidiaries) for periods after the completion of the Business Combination.
The following discussion and analysis should be read in conjunction with our audited consolidated financial statement the related notes appearing elsewhere in this Report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” as set forth in this Report. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “Legacy QuantumScape”, “the Company”, “we”, “us” and “our” refer to the business and operations of Legacy QuantumScape and its consolidated subsidiaries prior to the Business Combination and to QuantumScape Corporation and its consolidated subsidiaries, following the closing of the Business Combination.
Overview
We are developing next generation battery technology for EVs and other applications. We believe that our technology will enable a new category of battery that meets the requirements for broader market adoption. The lithium-metal solid-state battery technology that we are developing is being designed to offer greater energy density, longer life, faster charging, and greater safety when compared to today’s conventional lithium-ion batteries.
We are a development stage company with no revenue to date, have incurred a net loss from operations of approximately $215.3 million for the year ended December 31, 2021 and an accumulated deficit of approximately $2.0 billion from our inception through December 31, 2021. We expect to incur significant expenses and continuing losses for the foreseeable future.
Key Trends, Opportunities and Uncertainties
We are a pre-revenue company. We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose significant risks and challenges, including those discussed below and in the section titled “Risk Factors” appearing elsewhere in this Report.
Product Development
We are developing our battery technology with the goal of enabling commercial production between 2024 and 2025. We have validated capabilities of our solid-state separator and battery technology in single-layer solid-state cells. We are now working to develop multi-layer cells, to validate the performance of these cells and to continue to improve yield and performance of our battery cells.
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We have described our research and development programs to make further improvements to our battery technology, including improvements to battery performance and cost under the “Research and Development” section in Item 1 above. Major remaining development activities include, but are not limited to:
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Multi-layering. We are working to continue increasing the number of layers in our cells. We have demonstrated capabilities of our solid-state separator and battery technology in single-layer, four-layer and 10-layer solid-state cells in commercially relevant areas (ranging from approximately 60x75mm to 70x85mm). In February 2022, we announced early cycling test results for 16-layer cells also in commercially relevant areas. In order to produce commercially-viable solid-state battery cells, we must produce battery cells with several dozens of layers, the exact number of which depends on our customers’ requirements. We will need to overcome the developmental challenges to increase the layer count and implement the appropriate cell design for our solid-state battery cell.
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Continued improvement in the quality of our solid-state separator. We are working to improve the quality and consistency of our solid-state separators, to further improve, among other things, the cycling behavior, power, operating conditions of our cells and to continue to reduce separator thickness.
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Improvement of our separator manufacturing process. We have selected a method of continuous processing found at scale in both the battery and ceramic industries and are working on continuous improvement of this process, including better consistency and higher throughput. Regarding consistency, tightening the variability of separator quality results in better yield. Regarding throughput, increasing the volume of separator production results in the increased quantities required for higher layer counts and delivery of more test cells to prospective customers. We are automating our manufacturing process and purchasing larger-scale manufacturing equipment. We will need to substantially improve our manufacturing processes to increase throughput required for higher layer counts and to achieve the cost, performance and volume levels required for commercial shipments.
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Continued improvement of the cathode. Our cathodes use a conventional cathode active material such as NMC mixed with a catholyte. We plan to benefit from industry cathode chemistry improvements and/or cost reduction, which in the future may include use of other cathode active materials, including cobalt-free compositions, including LFP, as well as cathode processing advances such as dry electrode processing. Over the years, we have developed catholytes made of differing mixtures of organic polymer and organic liquid electrolyte to optimize performance across multiple metrics such as voltage, temperature, power, and safety, among others. We continue to test solid, gel and liquid catholytes in our cells. The solid catholyte is part of our ongoing research and development investigation into inorganic catholytes. Our solid-state separator platform is being designed to enable high rates of charge and discharge for even thicker cathode electrodes, which when combined with a lithium-metal anode, may further increase cell energy densities.
Our team of over 500 scientists, engineers, technicians, and other staff is highly motivated and committed to solving these challenges ahead. However, any delays in the completion of these tasks will require additional cash use and delay market entry. As we grow our team, expand the size of our engineering line capacity, and build-out and bring up our QS-0 and QS-1, our rate of cash utilization will also increase significantly.
Process Development
Our architecture depends on our proprietary solid-state ceramic separator which we will manufacture ourselves. Though our separator’s design is unique, its manufacturing relies on well-established, high-volume production processes currently deployed globally in other industries at large scale.
The solid-state separator is being designed to enable our ‘anode-free’ architecture. As manufactured, our solid-state battery cell has no anode; the lithium-metal anode is formed during the first charge of the cell; 100% of the lithium that forms the anode comes from the cathode material we purchase. Eliminating the anode bill of materials and associated manufacturing costs found in conventional lithium-ion cells could result in a meaningful cost of goods sold advantage for us. In addition, our solid-state battery cell is being designed to reduce the time and capital-intensity of the formation process step as compared to conventional lithium-ion manufacturing.
We are focused on the continued expansion of the throughput and capability of our San Jose, California engineering line as well as the planning and setup of our QS-0 and planning for our QS-1. As part of the continued expansion of our throughput we are automating our manufacturing process and purchasing larger-scale battery-cell manufacturing equipment. We will need to substantially improve our battery cell manufacturing processes to increase throughput required for higher numbers of battery cells and to achieve the cost, performance and volume levels required for commercial shipments.
Continued expansion of the throughput and capability of our San Jose engineering line and QS-0 serves two purposes. First, the engineering line and QS-0 are intended to provide a sufficient quantity of solid-state separators and cells for internal development and for customer sampling. And second, our San Jose engineering line and QS-0 are intended to provide the basis for continued manufacturing process development and help inform tool selection and specifications for equipment for QS-1. Delays in the successful buildout of our San Jose engineering line and QS-0 may impact both our development and the QS-1 timelines.
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We will need to achieve significant cost savings in battery design and manufacturing, in addition to the cost savings associated with the elimination of an anode from our solid-state battery cells, while controlling costs associated with the manufacture of our solid-state separator, including achieving substantial improvements in throughput and yield required to hit commercial targets. Further, we will need to capture industry cost savings in the materials, components, equipment, and processes that we share, notably in the cathode, cell design, and factory.
Commercialization and Market Focus
As noted above, we will continue developing our battery technology with the goal of enabling customer prototype sampling in 2022, samples for use in test cars in 2023, and commercialization beginning between 2024 and 2025. We have demonstrated the performance capabilities of our solid-state separator and battery technology in single-layer, four-layer, and 10-layer solid-state cells and more recently announced early cycling test results of 16-layer solid-state cells, in each case in commercially relevant areas (ranging approximately from 60x75mm to 70x85mm). We will work to continue improving quality, consistency and throughput and optimize all components of the cell. We will continue to work to further develop and validate the volume manufacturing processes to enable high volume manufacturing and minimize manufacturing costs. The funds available to us will enable us to expand and accelerate research and development activities and undertake additional initiatives. Finally, we will continue to use and expand on our engineering line in San Jose to prepare for high volume manufacturing, to continue to order QS-0 equipment and prepare our QS-0, and to plan our QS-1 through our joint venture partnership with Volkswagen.
QS-1 to be built and run by QSV and the subsequent QS-1 Expansion, would represent a small fraction of Volkswagen’s demand for batteries and implies vehicle volumes under 2.5% of Volkswagen’s total production in 2021, assuming a 100kWh battery pack size. Our goal is to significantly expand the production capacity of the joint venture, in partnership with Volkswagen, to meet more of their projected demand. While we expect Volkswagen will be the first to commercialize vehicles using our battery technology, we intend to work closely with other automotive original equipment manufacturers (“OEMs”) to make our solid-state battery cells widely available over time. We recently signed an agreement with a second top ten (by global revenues) automotive OEM in which the OEM committed to collaborate with us to evaluate prototypes of our solid-state battery cells, and to purchase 10 MWh of capacity from QS-0 for inclusion in pre-series vehicles, subject to satisfactory validation of intermediate milestones. We are currently focused on automotive EV applications, which have the most stringent set of requirements for batteries. However, we recognize that our solid-state battery technology has applicability in other large and growing markets including stationary storage and consumer electronics such as smartphones and wearables and will explore opportunities in those areas as appropriate.
We believe that our technology enables a variety of business models. In addition to joint ventures, such as the one with Volkswagen, we may operate solely-owned manufacturing facilities or license our technology to other manufacturers. We intend to continue to invest in research and development to improve battery cell performance, improve manufacturing processes, and reduce cost.
Access to Capital
Following the Business Combination, the March 2021 Public Offering (See Note 10), and assuming we experience no significant delays in the research and development of our solid-state battery cells, we believe that our cash resources are sufficient to fund QS-0 expenses and the initial setup of the QS-1 production facilities. However, any delays could materially impact us.
Regulatory Landscape
We operate in an industry that is subject to many established environmental regulations, which have generally become more stringent over time, particularly in hazardous waste generation and disposal and pollution control. Regulations in our target markets include economic incentives to purchasers of EVs, tax credits for EV manufacturers, and economic penalties that may apply to a car manufacturer based on its fleet-wide emissions which may indirectly benefit us in that the regulations will expand the market size of EVs. While we expect environmental regulations to provide a tailwind to our growth, it is possible for certain regulations to result in margin pressures. Trade restrictions and tariffs, while historically minimal between the European Union and the United States where most of our production and sales are expected, are subject to unknown and unpredictable change that could impact our ability to meet projected sales or margins.
Basis of Presentation
We currently conduct our business through one operating segment. As a pre-revenue company with no commercial operations, our activities to date have been limited and were conducted primarily in the United States. Our historical results are reported under U.S. GAAP and in U.S. dollars. Upon commencement of commercial operations, we expect to expand our global operations substantially, including in the United States and the European Union, and as a result we expect our future results to be sensitive to foreign currency transaction and translation risks and other financial risks that are not reflected in our historical financial statements. As a result, we expect that the financial results we report for periods after we begin commercial operations will not be comparable to the financial results included in this Report.
Components of Results of Operations
We are a research and development stage company and we have not generated any revenues to date. Our historical results may not be indicative of our future results for reasons that may be difficult to anticipate. Accordingly, the drivers of our future financial results, as well as the components of such results, may not be comparable to our historical or projected results of operations.
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Operating Expenses
Research and Development Expense
To date, our research and development expenses have consisted primarily of personnel-related expenses for scientists, experienced engineers and technicians as well as costs associated with the expansion and ramp up of our engineering and QS-0 facilities in San Jose, including the material and supplies to support the product development and process engineering efforts. As we ramp up our engineering operations to complete the development of our solid-state, lithium-metal batteries and required process engineering to meet automotive cost targets, we anticipate that research and development expenses will increase significantly for the foreseeable future as we expand our hiring of scientists, engineers, and technicians and continue to invest in additional plant and equipment for product development (e.g. multi-layer cell stacking, packaging engineering), building prototypes, and testing of battery cells as our team works to meet the full set of automotive product requirements. We also recognized significant non-cash stock-based compensation to employees directly involved in research and development activities. For stock-based compensation awards with performance and market conditions, such as the awards granted under our Extraordinary Performance Award Program (the “EPA Program”) in December 2021, the non-cash expense recognized is based on a probability assessment of the performance conditions, and as such, we expect research and development expenses to fluctuate in the future as the performance conditions are re-assessed at each reporting period. Further, should the stated market conditions of the EPA Program grants be achieved prior to the expected achievement period, we would accelerate the stock-based compensation expense recognized, which could result in significant fluctuations in research and development expense recognized in the future. For more information on the EPA Program and grants thereunder, see Note 10 to our audited consolidated financial statements elsewhere in this Report.
As we ramp up towards commercial manufacturing operations, we will begin to incur expenses that are directly associated with manufacturing, including allocation of indirect costs from research and development.
General and Administrative Expense
General and administrative expenses consist mainly of personnel-related expenses for our executive, sales and marketing and other administrative functions and expenses for director and officer insurance and outside professional services, including legal, accounting and other advisory services. We are rapidly expanding our personnel headcount and supporting systems, in anticipation of planning for and supporting the ramping up of commercial manufacturing operations and being a public company. Accordingly, we expect our general and administrative expenses to increase significantly in the near term and for the foreseeable future. Upon commencement of commercial operations, we also expect general and administrative expenses to include customer and sales support and advertising costs. We also recognize significant non-cash stock-based compensation to executives and certain employees. The non-cash expense recognized for EPA Program grants is based on a probability assessment of the performance conditions, and as such, we expect general and administrative expenses to fluctuate in the future as the performance conditions are re-assessed at each reporting period. Further, should the stated market conditions of the EPA Program awards be achieved prior to the expected achievement period, we would accelerate the stock-based compensation expense recognized, which could result in significant fluctuations in general and administrative expense recognized in the future.
As we ramp up towards commercial manufacturing operations, we will begin to incur expenses that are directly associated with manufacturing, including allocation of indirect costs from general and administrative activities.
Other Income (Expense)
Change in Fair Value of Assumed Common Stock Warrant Liability
The change in fair value of Assumed Common Stock Warrant liabilities consists of the change in non-cash fair value of the Public Warrants and the private placement warrants assumed in connection with the Business Combination (the "Private Placement Warrants"). As all Assumed Common Stock Warrants were exercised or redeemed as of December 31, 2021, there was no remaining liability for Assumed Common Stock Warrants.
Change in Fair Value of Series F Convertible Preferred Stock Tranche Liability
A portion of the Series F convertible preferred stock tranche liabilities (as defined below) were settled upon the issuance of the shares of Series F Preferred Stock concurrent with the Business Combination, and the remaining commitment to issues shares of Class A Common Stock pursuant to the Series F Stock Purchase Agreements became equity classified upon the consummation of the Business Combination. Accordingly, we have not incurred incremental fair value adjustments related to the Series F convertible preferred stock tranche liabilities subsequent to November 2020.
Interest Expense
Interest expense consists primarily of interest expense associated with our QS-0 facility lease and includes expense related to fair value adjustments for convertible preferred stock warrants prior to the Business Combination. Concurrent with the Business Combination, the Legacy QuantumScape convertible preferred stock warrants became equity classified. Accordingly, we have not incurred incremental fair value adjustments related to the Legacy QuantumScape convertible preferred stock warrants subsequent to November 2020.
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Interest Income
Interest income consists primarily of interest income from marketable securities.
Other Income (Expense)
Our other income (expense) consists of miscellaneous income and expenses such as the gain on the disposal of fixed assets, sublease income and receipt for a legal settlement.
Income Tax Expense / Benefit
Our income tax provision consists of an estimate for U.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities, and changes in the tax law. We maintain a valuation allowance against the full value of our U.S. and state net deferred tax assets because we believe the recoverability of the tax assets is not more likely than not.
Results of Operations
In this section, we discuss the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020. For a discussion of the year ended December 31, 2020 and the year ended December 31, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 2020.
The following table sets forth our historical operating results for the periods indicated (amounts in thousands):
| Year Ended December 31, | 2021 vs. 2020 | 2020 vs. 2019 | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||
| Research and development | $ | 151,496 | $ | 65,103 | $ | 45,944 | $ | 86,393 | 133 | % | $ | 19,159 | 42 | % | ||||||||||||||
| General and administrative | 63,770 | 15,918 | 9,874 | 47,852 | 301 | % | 6,044 | 61 | % | |||||||||||||||||||
| Total operating expenses | 215,266 | 81,021 | 55,818 | 134,245 | 166 | % | 25,203 | 45 | % | |||||||||||||||||||
| Loss from operations | (215,266 | ) | (81,021 | ) | (55,818 | ) | (134,245 | ) | 166 | % | (25,203 | ) | 45 | % | ||||||||||||||
| Other (expense) income: | ||||||||||||||||||||||||||||
| Interest expense | (1,419 | ) | (20,765 | ) | (94 | ) | 19,346 | (93 | )% | (20,671 | ) | 21990 | % | |||||||||||||||
| Interest income | 1,883 | 1,093 | 3,608 | 790 | 72 | % | (2,515 | ) | (70 | )% | ||||||||||||||||||
| Change in fair value of Series F convertible preferred stock tranche liabilities | — | (999,987 | ) | — | 999,987 | (100 | )% | (999,987 | ) | 100 | % | |||||||||||||||||
| Change in fair value of assumed common stock warrant liabilities | 168,674 | (581,863 | ) | — | 750,537 | (129 | )% | (581,863 | ) | 100 | % | |||||||||||||||||
| Other income | 151 | 760 | 1,041 | (609 | ) | (80 | )% | (281 | ) | (27 | )% | |||||||||||||||||
| Total other (expense) income: | 169,289 | (1,600,762 | ) | 4,555 | 1,770,051 | (111 | )% | (1,605,317 | ) | (35243 | )% | |||||||||||||||||
| Net loss | (45,977 | ) | (1,681,783 | ) | (51,263 | ) | 1,635,806 | (97 | )% | (1,630,520 | ) | 3181 | % | |||||||||||||||
| Less: Net (loss) income attributable to non-controlling interest | (11 | ) | (6 | ) | 20 | (5 | ) | 83 | % | (26 | ) | (130 | )% | |||||||||||||||
| Net loss attributable to common stockholders | $ | (45,966 | ) | $ | (1,681,777 | ) | $ | (51,283 | ) | $ | 1,635,811 | (97 | )% | $ | (1,630,494 | ) | 3179 | % |
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Research and Development
The increase in research and development expense in the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily resulted from the $35.7 million increase in personnel cost due to the growth in research and development headcount to support technology development, an increase of $11.8 million in material supplies and equipment maintenance to support the increase of research and development cell builds in our commercial form factor, an increase of $6.1 million related to depreciation and amortization, a $6.8 million increase in facility expenses and a $6.2 million increase in professional fees, outside services and administrative expenses related to the growth in research and development. Additionally, non-cash stock-based compensation expense increased by $19.8 million from $9.9 million for the year ended December 31, 2020 to $29.7 million for the year ended December 31, 2021 primarily due to the effect of RSUs granted in the second half of fiscal 2020 and in fiscal 2021. Non-cash stock-based compensation expense for the year ended December 31, 2021 includes $0.8 million related to EPA Program grants.
General and Administrative
The increase in general and administrative expenses in the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily resulted from the $15.5 million increase in professional fees and other corporate expenses due to costs associated with becoming a public company and business growth, an increase of $10.4 million in personnel costs due to the headcount increase to support business growth and an increase of $6.6 million in director and officer insurance expenses. Additionally, non-cash stock-based compensation expense increased by $15.4 million, from $7.1 million for the year ended December 31, 2020 to $22.5 million for the year ended December 31, 2021 primarily due to the effect of RSUs granted in the second half of fiscal 2020 and in fiscal 2021. Non-cash stock-based compensation expense for the year ended December 31, 2021 included $1.6 million related to EPA Program grants.
Interest Expense
Interest expense during the year ended December 31, 2021 was due to the interest expense associated with a finance lease, which commenced during that year.
Interest expense during the year ended December 31, 2020 primarily represented the non-cash fair value adjustment of Legacy QuantumScape convertible preferred stock warrants. Prior to the Business Combination, the warrants were considered free standing financial instruments and were subject to fair value measurement at issuance and at each reporting period. In connection with the Business Combination, the fair value of the warrants to purchase shares of our preferred stock were adjusted based on the fair value of the underlying common stock. The warrant liability was reclassified to additional paid-in capital and there was no further re-measurement of these warrants subsequent to the Business Combination.
Interest Income
The increase in interest income during the year ended December 31, 2021 compared to the year ended December 31, 2020 was due to an increase in investments in marketable securities.
Change in Fair value of Series F Convertible Preferred Stock Tranche Liability
The change in fair value of Series F convertible preferred stock tranche liabilities for the year ended December 31, 2020 consisted of the non-cash fair value adjustment of the preferred stock tranche liabilities. In May 2020 and August 2020, we committed to sell, and investors committed to buy, Series F redeemable convertible preferred stock totaling up to $388.0 million in gross proceeds. Approximately $188.0 million closed in connection with the Business Combination and $100.0 million closed on December 1, 2020. An additional $100.0 million closed in 2021.
Prior to the Business Combination, the commitments were considered free standing financial instruments and were classified as liabilities and subject to fair value measurement at issuance and at each reporting period. Concurrent with the Business Combination, the entire commitment was adjusted based on the fair value of the underlying common stock and a portion of the Series F convertible preferred stock tranche liabilities were settled upon the issuance of the shares of Series F Preferred Stock. Additionally, the remaining commitment to issues shares of Class A Common Stock pursuant to the Series F Stock Purchase Agreements became equity classified and were reclassified to additional paid-in capital, with no further remeasurement required.
Change in Fair value of Assumed Common Stock Warrant Liability
The change in fair value of Assumed Common Stock Warrant liabilities was due to the change in the estimated non-cash fair value of the Public and Private Placement Warrants we assumed in connection with the Business Combination, at the end of each reporting period or through the exercise or redemption of the warrants.
The changes in fair value of Assumed Common Stock Warrant liabilities during the years ended December 31, 2021 and 2020 were due to the changes in the fair value of the Public Warrants and Private Placement Warrants subsequent to the Business Combination. As all Assumed Common Stock Warrants were exercised or redeemed as of December 31, 2021, there was no remaining liability for Assumed Common Stock Warrants.
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Other Income
Other income for the year ended December 31, 2021 consisted of the gain on the disposal of fixed assets and foreign currency exchange gain. Other income for the year ended December 31, 2020 consisted of the receipt for a legal settlement.
Liquidity and Capital Resources
As of December 31, 2021, our principal sources of liquidity were our cash and cash equivalents and marketable securities in the amount of approximately $1.4 billion. Our cash equivalents are invested in U.S. money market funds, U.S. Treasury bonds and commercial paper. Our marketable securities are invested in U.S. Treasury notes and bonds, commercial paper, and corporate notes and bonds.
We have yet to generate any revenue from our business operations. To date, we have funded our capital expenditure and working capital requirements through equity as further discussed below. Our ability to successfully develop our products, commence commercial operations and expand our business will depend on many factors, including our working capital needs, the availability of equity or debt financing and, over time, our ability to generate cash flows from operations.
Prior to the Business Combination, we financed our operations primarily from the sales of redeemable convertible preferred stock. In connection with the Business Combination, we received net cash proceeds of approximately $676.9 million. Additionally, after the Business Combination, during the year ended December 31, 2020, we received proceeds of approximately $99.8 million from the Series F Preferred Stock Purchase Agreements.
During the year ended December 31, 2021, we completed the March 2021 Public Offering for aggregate net cash proceeds of $462.9 million. In April 2021, we received $100 million from VGA pursuant to our achievement of the technical milestone specified in the Series F Preferred Stock Purchase Agreements. Also, during the year ended December 31, 2021, all Assumed Common Stock Warrants were exercised or redeemed and we received net proceeds of $151.4 million.
We believe that our cash on hand will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months from the date of this Report. We believe it is also sufficient to fund QS-0 expenses, and our initial start of QS-1 production. We may, however, need additional cash resources due to changed business conditions or other developments, including unanticipated delays in negotiations with automotive OEMs and tier-one automotive suppliers or other suppliers, supply chain challenges, disruptions due to the COVID-19 pandemic, competitive pressures, and regulatory developments, among others. To the extent that our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If such financing is not available, or if the financing terms are less desirable than we expect, we may be forced to decrease our level of investment in product development or scale back our operations, which could have an adverse impact on our business and financial prospects.
Cash Flows and Material Cash Requirements
The following table provides a summary of our cash flow data for the periods indicated (amounts in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||
| Net cash used in operating activities | $ | (127,909 | ) | $ | (61,263 | ) | $ | (41,731 | ) | |||
| Net cash (used in) provided by investing activities | (385,834 | ) | (802,648 | ) | 33,301 | |||||||
| Net cash provided by financing activities | 736,557 | 953,724 | 394 |
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Cash Flows from Operating Activities
Our cash flows used in operating activities to date have been primarily driven by the growth in our underlying business to support the research and development of our battery technology. Such cash flows primarily have been comprised of payroll, material and supplies, facilities expense, and professional service related to research and development and general and administrative activities. As we continue to ramp up hiring for technical headcounts to accelerate our engineering efforts ahead of starting the pre-pilot and pilot line operations, we expect our cash used in operating activities to increase significantly before we start to generate any material cash flows from our business. Operating lease commitments as of December 31, 2021, will result in cash payments of $3.4 million for 2022 and $50.7 million for 2023 and thereafter. These operating lease commitments are primarily related to our facilities in San Jose, including a new lease that commenced in November 2021. In November 2021, we also entered into lease agreements for additional premises adjacent to the QS-0 site, which will commence in 2022. These leases are expected to result in future cash payments of approximately $38.6 million over respective 10-year terms. As we complete the development of our solid-state, lithium-metal batteries and required process engineering to meet automotive cost targets, we anticipate that research and development operating expenses will increase significantly for the foreseeable future.
Cash used during the year ended December 31, 2021 was primarily driven by a net loss of $46.0 million adjusted by non-cash income of $168.7 million related to the change in fair value of Assumed Common Stock Warrant liabilities and offset by non-cash expenses including $52.2 million related to stock-based compensation, $11.8 million related to amortization of premiums and accretion of discounts on marketable securities, and $11.2 million related to depreciation and amortization. This was partially offset by an increase of $13.2 million in accrued compensation, accounts payable and accrued liabilities due to spending in materials and supplies, professional services, personnel and general and administrative to support the growth of the business, especially in the research and development of our battery technology.
Cash used during the year ended December 31, 2020 was primarily driven by a net loss of $1,681.8 million, offset by non-cash expenses including $581.9 million for the change in fair value of the Assumed Common Stock Warrants, $20.8 million for the change in the fair value of Legacy QuantumScape convertible preferred stock warrants, $999.9 million for the issuance and change in the fair value of the Series F convertible preferred stock tranche liabilities, $17.0 million related to stock based compensation and $7.5 million related to depreciation and amortization.
Cash used during the year ended December 31, 2019 was primarily driven by a net loss of $51.3 million, offset by non-cash expenses including $5.6 million related to depreciation and amortization and $6.8 million related to stock-based compensation.
Cash Flows from Investing Activities
Our cash flows from investing activities to date have been comprised of purchases of property and equipment and purchases, maturities and sales of our marketable securities. We expect the level of capital investment to increase substantially in the near future as we fully build out our engineering lines as well as acquire the property and equipment for QS-0.
Cash used in investing activities for the year ended December 31, 2021 primarily consisted of $127.2 million for various equipment purchases to primarily support our research and development activities and $1.4 billion for the purchase of marketable securities, offset in part by the proceeds received from the maturity and sale of marketable securities of $894.2 million and $224.1 million, respectively.
Cash used in investing activities for the year ended December 31, 2020 primarily consisted of $24.1 million for various equipment purchases and $891.6 million for the purchase of marketable securities, offset in part by the proceeds received from the maturity of marketable securities of $99.0 million and the sales of marketable securities of $14.0 million.
Cash provided by investing activities for the year ended December 31, 2019 primarily consisted of proceeds received from the maturities of marketable securities of $239.5 million, offset in part by cash used for equipment purchases of $9.8 million and $196.4 million used for the purchase of marketable securities.
Cash Flows from Financing Activities
Our cash flows from financing activities primarily consist of proceeds from the sales of equity securities and, subsequent to the Business Combination, include the proceeds received from the exercise of the Assumed Common Stock Warrants.
As of December 31, 2021, the lease commitment for QS-0 is a finance lease commitment. As such, the net cash payments for this commitment is classified as a financing activity on our cash flows. Our future obligations under this finance lease will result in net cash payments of $2.4 million for 2022 and payments of $53.2 million for 2023 and thereafter.
The cash provided by financing activities during the year ended December 31, 2021 was primarily due to $462.9 million in net proceeds received from the March 2021 Public Offering, $151.4 million received from the exercise of Public Warrants and Private Placement Warrants, $99.9 million in net proceeds received from the Series F Preferred Stock Agreements, and approximately $17.8 million received from the exercise of stock options and our employee stock purchase plan.
The cash provided by financing activities during the year ended December 31, 2020 was primarily due to $676.9 million in net proceeds received from the Business Combination and related PIPE financing, as well as $276.3 million in net proceeds received from the Legacy QuantumScape Series F Preferred Stock agreements discussed above.
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The cash provided by financing activities during the year ended December 31, 2019 was primarily due to proceeds received from the exercise of stock options.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, as defined under SEC rules.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with U.S. GAAP. In the preparation of these financial statements, we are required to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported expenses incurred during the reporting periods.
We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the consolidated financial statements. Our significant accounting policies are described in Note 2 to our audited consolidated financial statements included elsewhere in this Report. We believe that the following accounting estimates are the most critical to fully understand and evaluate our reported financial results, as they require our most subjective or complex management judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain and unpredictable.
Stock-Based Compensation
The share-based awards under our equity plans include stock options, RSU and performance-based awards under the EPA Program. We recognize the cost of share-based awards granted to employees and directors based on the estimated grant-date fair value of the awards. Cost is recognized on a straight-line basis over the service period, which is generally the vesting period of the award. We reverse previously recognized costs for unvested awards in the period that forfeitures occur.
The fair value of RSUs is measured on the grant date based on the closing fair market value of our common stock.
The fair values of options granted with performance (e.g. business milestone) and market conditions (e.g. stock price target) are estimated at the grant date using a Monte Carlo simulation model. The model determined the grant date fair value of each vesting tranche and the future time when the market condition for such tranche is expected to be achieved. The Monte Carlo valuation requires the Company to make assumptions and judgements about the variables used in the calculation including the expected term, volatility of our common stock, an assumed risk-free interest rate, and cost of equity.
For performance-based awards with a vesting schedule based entirely on the attainment of both performance and market conditions, each quarter the Company assesses whether it is probable that it will achieve each performance condition that has not previously been achieved or deemed probable of achievement and if so, the future time when the Company expects to achieve that business milestone, or its “expected business milestone achievement time.” When the Company first determines that a business milestone has become probable of being achieved, the Company allocates the entire expense for the related tranche over the number of quarters between the grant date and the then-applicable “expected vesting date.” The “expected vesting date” at any given time is generally the later of (i) the expected time when the performance condition will be achieved (if the related performance condition has not yet been achieved) and (ii) the expected time when the market condition will be achieved (if the related market condition has not yet been achieved). The Company immediately recognizes a cumulative catch-up expense for all accumulated expense for the quarters from the grant date through the quarter in which the performance condition was first deemed probable of being achieved. Each quarter thereafter, the Company recognizes the prorated portion of the then-remaining expense for the tranche based on the number of quarters between such quarter and the then-applicable expected vesting date, except that upon vesting of a tranche, all remaining expense for that tranche is immediately recognized. The Company accounts for forfeitures when they occur. The fair value of such awards is estimated on the grant date using Monte Carlo simulations, which is impacted by the following assumptions:
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Expected Term—We estimated the expected term based on the midpoint between the time of vesting and the remaining time to expiration.
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Expected Volatility—Given the limited market trading history of our common stock, volatility is based on a weighted blend of (i) the average volatility of peer companies within the automotive and energy storage industries multiplied by a ratio of our volatility based on available stock price data as compared to the average volatility of our peer companies over the same period and (ii) our implied volatility from exchange traded options.
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Cost of Equity—Cost of equity is calculated using (i) risk-free rate, (ii) average peer group market beta and (iii) the market-risk premium.
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As the stock-based compensation expense is based on the probability assessment of the performance conditions, we may experience significant fluctuation in the non-cash stock-based compensation recognized quarter over quarter. Although the potential stock-based compensation expense that may be recognized over the remaining term of the performance award may be estimated at each of the applicable grant date and the amount is expected to be material to the financial statements in the aggregate, the actual expense recognized may range from zero to the maximum; the actual expense may be recognized over a period less than the remaining term of the performance award; and the amount recognized quarter over quarter is expected to be material and may significantly fluctuate.
Assumed Common Stock Warrant Liabilities
The Company assumed 11,499,989 Public Warrants and 6,650,000 Private Placement Warrants upon the Business Combination, all of which were issued in connection with Kensington’s initial public offering (other than 75,000 Private Placement Warrants that were issued in connection with the closing of the Business Combination, which are referred to as the Working Capital Warrants) and entitled each holder to purchase one share of Class A Common Stock at an exercise price of $11.50 per share. The Public Warrants were publicly traded and were exercisable for cash unless certain conditions occurred, such as the failure to have an effective registration statement related to the shares issuable upon exercise or redemption by the Company under certain conditions, at which time the warrants could be cashless exercised. The Private Placement Warrants were transferable, assignable or salable in certain limited exceptions. The Private Placement Warrants were exercisable for cash or on a cashless basis, at the holder’s option, and were non-redeemable until September 28, 2021 so long as they were held by the initial purchasers or their permitted transferees. If the Private Placement Warrants were held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants would have ceased to be Private Placement Warrants, and would have become Public Warrants and would be redeemable by the Company and exercisable by such holders on the same basis as the other Public Warrants.
The Company evaluated the Assumed Common Stock Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, and concluded they did not meet the criteria to be classified in stockholders’ equity. Specifically, the exercise of the Assumed Common Stock Warrants could have been settled in cash upon the occurrence of a tender offer or exchange that involves 50% or more of our Class A stockholders. Because not all of the voting stockholders need to participate in such tender offer or exchange to trigger the potential cash settlement and the Company does not control the occurrence of such an event, the Company concluded that the Assumed Common Stock Warrants did not meet the conditions to be classified in equity. Since the Assumed Common Stock Warrants meet the definition of a derivative under ASC 815, the Company recorded these warrants as liabilities on the Consolidated Balance Sheet at fair value, with subsequent changes in their respective fair values recognized in the Change in fair value of assumed common stock warrant liabilities within the Consolidated Statement of Operations and Comprehensive Income (Loss) at each reporting date prior to exercise or redemption. The Public Warrants were publicly traded and thus had an observable market price to estimate fair value, and the Private Placement Warrants were effectively valued similar to the Public Warrants when the Public Warrants were publicly traded, and consistent with the intrinsic value of the Company's common stock subsequent to the redemption of the Public Warrants, as described in Note 5 to the consolidated financial statements. As all Assumed Common Stock Warrants were exercised or redeemed during the year ended December 31, 2021, there was no remaining liability for Assumed Common Stock Warrants as of December 31, 2021.
Recent Accounting Pronouncements
See Note 3 to the audited consolidated financial statements in this Report for more information about recent accounting pronouncements, the timing of their adoption, and our, to the extent it has made one, of their potential impact on our financial condition and its results of operations and cash flows.