D-Wave Quantum Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results are compared with the same 2021 periods. The August 5, 2022 Business Combination made D-Wave Quantum Inc. public; the transaction was accounted for as a reverse recapitalization, with D-Wave Systems as the accounting acquirer. The company sells quantum-computing-as-a-service (QCaaS), professional services and training.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1.695 million | $1.307 million | $4.778 million | $3.853 million |
| Gross profit | $1.086 million | $1.000 million | $3.000 million | $2.980 million |
| Gross margin | 64.1% | 76.5% | 62.8% | 77.3% |
| Operating expenses | $16.354 million | $10.793 million | $40.898 million | $31.074 million |
| Operating loss | $15.268 million | $9.793 million | $37.898 million | $28.094 million |
| Net loss | $13.053 million | $4.209 million | $37.868 million | $17.705 million |
| Net loss per share | $0.11 | $0.03 | $0.31 | $0.14 |
Revenue rose 30% in Q3 and 24% year to date, mainly on higher QCaaS sales. However, cost of revenue rose faster, and gross margin declined. Q3 general and administrative expense increased 147%, primarily due to public-company costs, higher personnel and stock compensation, professional services, and insurance. Research and development and sales and marketing expenses also increased.
At September 30, cash was $13.764 million; total assets were $38.489 million and total liabilities were $39.199 million, leaving a $0.710 million stockholders’ deficit. Loans payable totaled $15.144 million, including $2.232 million current; the balance sheet also reports a $0.420 million related-party promissory note and $7.672 million of operating lease liabilities. The filing states a $11.7 million working-capital deficiency, but reported current assets of $26.279 million exceed current liabilities of $14.578 million by approximately $11.7 million. This apparent inconsistency merits verification.
For the first nine months, operating cash outflow was $34.270 million, investing cash outflow was $0.316 million, and financing cash inflow was $38.898 million. Cash increased by $4.281 million from $9.483 million at year-end 2021. The company reported an accumulated deficit of $363.1 million. Although the balance sheet shows positive working capital, management states that additional financing may be required to fund the next 12 months and that substantial doubt exists about the company’s ability to continue as a going concern.
Material changes and financing
- The Business Combination and $40 million PIPE closed in August. After redemptions, transaction costs and other items, the company reported $21.4 million of net Business Combination and PIPE proceeds; only about $9 million of DPCM trust cash was available after redemptions.
- The $20 million Venture Loan, plus interest and a final payment fee, was repaid at the Business Combination closing. Interest expense nevertheless increased substantially year over year.
- An equity line of credit (ELOC) with Lincoln Park provides for up to $150 million of share purchases through June 2025, subject to conditions, including a $1.00 floor price and ownership and volume limits. No shares were sold under it by September 30; sales began after the quarter following effectiveness of the resale registration statement on October 26.
- The company had 17.9 million warrants outstanding at quarter-end, exercisable at an effective price of approximately $7.91 per common share. Cash proceeds depend on exercise and are not assured. Subsequent to quarter-end, 764,796 shares were issued upon option exercises for $696,000.
Outlook, risks and unusual items
Management expects continued operating losses and negative operating cash flows while it invests in research and development and commercial growth. It expects R&D, sales and marketing, and public-company general and administrative costs to rise. Management anticipates QCaaS revenue will grow and become a larger share of revenue, but the filing provides no specific financial guidance. It says the company does not expect to meet the transaction forecasts, citing the later-than-assumed closing and substantial shareholder redemptions.
Risks include the need to raise additional capital on acceptable terms, potential dilution and share-price pressure from ELOC and resale-registration sales, customer concentration, ongoing losses, and execution and market-adoption uncertainty. Three customers each contributed at least 10% of Q3 revenue; two customers each contributed 13% of nine-month revenue. The filing reports no material litigation and no material COVID-19 impact in the periods presented. Foreign-exchange gains contributed to other income. A $2.603 million Q3 gain from changes in warrant fair value partly offset losses; the prior-year periods included government assistance income of $4.560 million for Q3 and $9.146 million for nine months, while 2022 recorded none in that income line.
Management concluded disclosure controls were not effective at quarter-end because of a material weakness in the financial close and reporting control environment, including insufficient experienced accounting personnel and review controls. Remediation efforts include hiring qualified staff, using consultants and segregating duties; the weakness was not yet considered remediated.
Important facts for investors to verify
- Reconcile the filing’s stated $11.7 million working-capital deficiency with current assets and liabilities shown on the balance sheet.
- Assess liquidity, cash burn and the going-concern uncertainty, including the amount and timing of any ELOC sales and other financing.
- Monitor revenue growth against rising cost of revenue and operating expenses, and the effect on gross margin and losses.
- Evaluate potential dilution and market overhang from registered resale shares, ELOC issuance, options, exchangeable shares and warrants.
- Track remediation and testing of the disclosed material weakness in internal controls.