QS: PowerCo Licensing Agreement
Headline
It’s Happening!!!! This deal is monumental for Quantumscape. One, the advanced royalty payment of $130 million dollars likely extends QS’s runway through the end of 2026. Two, the GWh scale up effort becomes collaborative where PowerCo is footing the bill. Three, it seems that the path to GWh scale is tangible and achievable. And four, and most importantly, this marks a huge risk-off event where VW is showing enough confidence in what they’ve seen from the prototypes delivered to take the next steps.
Okay, now that we’ve gotten the excitement out of our system, let’s take a look at some of the details of the deal.
Deal Review
Most of the following information will be summarized from the 8-K.
Overview
First off, this agreement is defined as a “Collaboration Agreement and IP License Agreement” where PowerCo (subsidiary owned by VW) will license the the technology package, in full, for Quantumscape’s QSE-5 product. I laid out this scenario in my Path To Commercialization article a couple weeks ago (see Figure 5 of that post). This is the cleanest path forward for both parties.
This agreement supersedes the previous Joint Venture agreement for QSV LLC. That Joint Venture is effectively terminated, and the exclusivity agreement that granted VW first dibs on commercialization should be terminated along with that agreement. This means that it’s possible that we hear more deals involving Quantumscape and other OEMs in the near future.
The agreement gives PowerCo the ability to build up to 40 GWh of production capacity (already exceeding the original JV’s 21 GWh goal) and gives PowerCo the option to expand that production rate to 80 GWh.
Intellectual Property
Article 7 of the agreement lays out rules regarding IP.
The agreement defines “background IP” as IP that has been developed and wholly owned by one of the parties (QS or PowerCo) prior to the the collaboration agreement being established. Background IP will stay with the original party.
Any new IP developed during this scale-up effort will be considered “joint IP” and will be jointly owned by both PowerCo and QS. This does not include IP developed concerning Quantumscape’s separator technology. That IP will belong, solely, to QS (see quote below).
all Separator IP shall belong to and be owned by QS, or shall be obligated to be assigned, and is hereby assigned, to QS, and QS shall be free to utilize such Separator IP without any restrictions, including licensing third parties the right to use the Separator IP.
Joint IP can be used by either party without restriction.
Each Party shall be free to exploit its share of any Joint IP without accounting to or requiring consent from the other Party (subject to Article X); [***].
Knowledge Transfer
Item 5.1 of the agreement is particularly interesting:
QS shall [***] provide the Scale-Up Team (and the Scale-Up Team shall transfer to PowerCo), with all know-how and information (including suppliers, data, specifications, processes, instruction and operating manuals, blueprints and designs) together with all other materials related to the QSE5 Technology that it owns or licenses…
Basically, QS will hand over everything developed, to date, to PowerCo in this effort. I was surprised this goes all the way down to the supplier level.
Royalty Payments
Unfortunately, pretty much all royalty information is redacted from the agreement. So we won’t know how much Quantumscape is expected to make from this agreement until they disclose it (which will probably be only after they begin collecting royalties).
This is probably tactical on Quantumscape’s part as it would otherwise limit negotiating power for future agreements with other OEMs. In that sense, it’s a good business move.
I originally posited that royalties could be in the $10-$15 per kWh range (see the licensing scenario laid out in the Path to Commercialization post). I have no basis other than that’s potentially expected cost savings from the anode-free design. An OEM could build the cell AND pay an additional $10-$15 licensing fee and still be economically competitive with legacy cell technologies.
We can do a quick check on the royalty pre-payment. Given that the pre-payment is $130 million and the initial agreement is for 40 GWh, that equates to $3.25 per kWh (assuming QS is receiving a full year’s worth of production up front, which, frankly, is not even a good baseline assumption).
This is honestly not even worth speculating on at the moment. There’s no way of knowing what this agreement will actually look like until one of the parties discloses it (or PowerCo begins shipping cells)
Licensing to Other OEMs
Interestingly enough, the agreement states that QS must give PowerCo the option to expand this existing relationship prior to QS licensing the QSE-5 package to any other third party. This option stays in place for 6 years after start of production. This could easily extend into the early 2030’s.
Prior to QS commencing any project similar to the Project with any third party for the license of QSE5 Technology, QS shall notify PowerCo and give PowerCo the option to expand its capacity [***] above the Initial Capacity limited to and in accordance with Section 2.6(a). QS’ obligation under this Section 2.6(b) shall survive for a period of six (6) years after SOP.
My guess is that PowerCo wants this provision in order to protect the Joint IP developed by the pair.
In addition, it doesn’t seem like this extends to QS selling cells that they’ve independently built. So QS should still be able to build their own factories and sell to third parties prior to the expiration of this clause.
Outperformance Sharing
There’s a clause - Article III, Item 3.3 - that has a provision for “outperformance sharing”, quoted below:
3.3Outperformance Sharing. [***].
We can all have some fun speculating on what this means. I won’t hazard a guess here.
Okay, I will hazard a guess. It could have something to do with the pricing power of PowerCo cells. PowerCo is a subsidiary of VW, but my understanding is that these plants won’t exclusively supply VW (i.e., Ford and the like can purchase cells from PowerCo). If QSE-5’s have a target of $100 per kWh (for example), but Ford really, really wants these cells for their highest tier Lightning and is willing to purchase them for $120 per kWh, perhaps QS will get some additional cut of that excess profit.
Another outperformance sharing metric might simply be linked to cell performance. If they are targeting certain spec’s / kpi’s with these cells, and exceed them, perhaps QS gets a bonus. These could potentially be related to performance or costs.
Agreement Termination
Article VI of the agreement.
The ability to terminate this agreement seems to be PowerCo’s sole right. QS can only terminate the agreement in the event of non payment by PowerCo. In the unfortunate event that PowerCo does terminate the agreement, QS will have to pay back some portion of the initial royalty fee (referred to as a “clawback” in the agreement). QS’s potential obligation will decrease more and more the longer this agreement is in place.
Accounting Notes
As part of the agreement, PowerCo has agreed to pay Quantumscape $130 million in advanced royalty payments. This is great news because it extends QS’s runway even further, and probably makes funding immediate expansion a little bit easier as they won’t need to wait for PowerCo to begin churning out cells.
It’s important to note that this money will not hit the income statement as revenue, however.
This type of payment is categorized as “deferred revenue”. What this means is that Quantumscape won’t be able to record this as revenue until it delivers a product or service. In this case, being that it’s a royalty, it’s likely that this payment won’t hit the income statement until cells are delivered to VW.
That being said, this is money changing hands, so it will make its way onto the cash flow statement, and will show up on the balance sheet as an asset (as cash) and a liability (being that the service is still owed).
Being that this agreement was signed in July, we’ll have to wait until the Q3 earnings report for this to show up. So don’t expect to see this hit the balance sheet in a couple of weeks.
Summary
Investors should take this as a win. QS will have the opportunity to learn their way to scale with little cash burn. And the best part: it delays the need for further near term dilution.
There’s still a long road ahead. I don’t think this implicitly guarantees successful scale-up. But it does act as a major risk-off event, and gives further evidence of tangible progress made by Quantumscape in their commercialization effort.