IonQ, Inc. (IONQ) FY 2022 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.
This Annual Report contains statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements contained in this Annual Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believes,” “expects,” “intends,” “estimates,” “projects,” “anticipates,” “will,” “plan,” “may,” “should,” or similar language are intended to identify forward-looking statements.
It is routine for our internal projections and expectations to change throughout the year, and any forward-looking statements based upon these projections or expectations may change prior to the end of the next quarter or year. Readers of this Annual Report are cautioned not to place undue reliance on any such forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Risks and uncertainties are identified under “Risk Factors” in Item 1A herein and in our other filings with the Securities and Exchange Commission (the “SEC”). All forward-looking statements included herein are made only as of the date hereof. Unless otherwise required by law, we do not undertake, and specifically disclaim, any obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise after the date of such statement.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report. Unless the context otherwise requires, the terms “IonQ,” “Legacy IonQ” “we,” “us,” “our” and similar terms refer to IonQ Quantum, Inc. prior to the consummation of the Business Combination and IonQ, Inc. and its wholly owned subsidiary, IonQ Quantum, Inc., after the consummation of the Business Combination. References to “dMY” refer to the predecessor company prior to the consummation of the Business Combination.
Overview
We are developing quantum computers designed to solve some of the world’s most complex problems, and transform business, society and the planet for the better. We believe that our proprietary technology, our architecture, and the technology exclusively available to us through license agreements will offer us advantages both in terms of research and development, as well as the commercial value of our intended product offerings.
Today, we sell access to several quantum computers of various qubit capacities and are in the process of researching and developing technologies for quantum computers with increasing computational capabilities. We currently make access to our quantum computers available via three major cloud platforms, AWS’s Amazon Braket, Microsoft’s Azure Quantum and Google’s Cloud Marketplace, and also to select customers via our own cloud service. This cloud-based approach enables the broad availability of QCaaS.
We supplement our QCaaS offering with professional services focused on assisting our customers in applying quantum computing to their businesses. We also expect to sell full quantum computing systems to customers, either over the cloud or for local access.
We are still in the early stages of commercial growth. Since our inception we have incurred significant operating losses. Our ability to generate revenue sufficient to achieve profitability will depend heavily on the successful development and further commercialization of our quantum computing systems. Our net losses were $48.5 million and $106.2 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $194.3 million. We expect to continue to incur significant losses for the foreseeable future as we prioritize reaching the technical milestones necessary to achieve an increasingly higher number of stable qubits and higher levels of fidelity than presently exists—prerequisites for quantum computing to reach broad quantum advantage.
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The Merger Agreement and Public Company Costs
On March 7, 2021, Legacy IonQ, dMY and Ion Trap Acquisition Inc. (the “Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, at the closing, the Merger Sub was merged with and into Legacy IonQ, with Legacy IonQ continuing as the surviving corporation following the merger, being a wholly owned subsidiary of dMY and the separate corporate existence of the Merger Sub ceased (the “Business Combination”). Commensurate with the Business Combination, dMY changed its name to IonQ, Inc. and Legacy IonQ changed its name to IonQ Quantum, Inc. IonQ became the successor registrant with the SEC, meaning that Legacy IonQ’s financial statements for previous periods will be disclosed in the registrant’s future periodic reports filed with the SEC.
While the legal acquirer in the Merger Agreement is dMY, for financial accounting and reporting purposes under accounting principles generally accepted in the United States of America (“U.S. GAAP”), Legacy IonQ is the accounting acquirer and the merger is accounted for as a “reverse recapitalization” (i.e., a capital transaction involving the issuance of stock by dMY for the stock of Legacy IonQ). A reverse recapitalization does not result in a new basis of accounting, and the financial statements of the Company represent the continuation of the financial statements of Legacy IonQ in many respects. Under this method of accounting, dMY is treated as the “acquired” company for financial reporting purposes.
As a result of the Business Combination, Legacy IonQ is the successor to an SEC registrant and is listed on the NYSE, which will require IonQ to continue to hire additional personnel as it continues to implement procedures and processes to address public company regulatory requirements and customary practices. As a public company, we have incurred and expect to continue to incur, expenses for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.
Impact of the Macroeconomic Climate on Our Business
The recent trends towards rising inflation may also materially adversely affect our business and corresponding financial position and cash flows. Inflationary factors, interest rates and overhead costs may adversely affect our operating results. Rising interest and inflation rates also present a recent challenge impacting the U.S. economy and could make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the future. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, we may experience increases in the near future (especially if inflation rates continue to rise) on our operating costs, including our labor, due to supply chain constraints, consequences associated with COVID-19 and the Russia-Ukraine war, and employee availability and wage increases, which may result in additional stress on our working capital resources.
Key Components of Results of Operations
Revenue
We have generated limited revenues since our inception. We derive revenue from providing access to quantum-computing-as-a-service (“QCaaS”), consulting services related to co-developing algorithms on our quantum computing systems, and from contracts associated with the design, development, and construction of specialized quantum computing systems together with related services. In arrangements with the cloud service providers, the cloud service provider is considered the customer and we do not have any contractual relationships with the cloud service providers’ end users.
We have determined that our QCaaS contracts represent a combined, stand-ready performance obligation to provide access to our quantum computing systems together with related maintenance and support. The transaction price generally includes a variable fee based on usage of our quantum computing systems and may include a fixed fee for a minimum volume of usage to be made available over a defined period of access. Fixed fee arrangements may also include a variable component whereby customers pay an amount for usage over contractual minimums contained in the contracts. We have determined that contracts that contain consulting
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services related to co-developing quantum computing algorithms and the ability to use our quantum computing systems to run such algorithms represent a combined performance obligation that is satisfied over-time with revenue recognized based on the efforts incurred to date relative to the total expected effort.
Certain of our contracts contain multiple performance obligations, most commonly in contracts for specialized quantum computing systems together with related maintenance and support. Such contracts may also include access to our QCaaS. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. When there are multiple performance obligations in a contract, we allocate the transaction price to each performance obligation based on its standalone selling price when available. We determine standalone selling price based on the observable price of a product or service when we sell the products or services separately in similar circumstances and to similar customers. When the standalone selling price is not known, due to it being either highly variable or uncertain, we allocate the transaction price using the residual approach.
For contracts with a fixed transaction price, the fixed fee is recognized on a straight-line basis over the access period or associated measure of progress for our consulting services contracts. For contracts without fixed fees, variable usage fees are billed and recognized during the period of such usage. Performance obligations are satisfied over-time if the customer receives the benefits as we perform the work, if the customer controls the asset as it is being produced (continuous transfer of control), or if the product being produced for the customer has no alternative use and we have a contractual right to payment for performance to date. Revenue is recognized on performance obligations satisfied over time based on the efforts incurred to date relative to the total expected effort.
We are currently focused on marketing our QCaaS and consulting services and have entered into, and are continuing to enter into, new contracts with customers. We have also engaged with certain prospects who are interested in purchasing entire quantum computers, either over the cloud or for local access.
Operating Costs and Expenses
Cost of revenue
Cost of revenue primarily consists of expenses related to delivering our services, including personnel-related expenses, allocated facility and other costs for customer facing functions, and costs associated with maintaining our in-service quantum computing systems to ensure proper calibration as well as costs incurred for maintaining the cloud on which the QCaaS resides. Personnel-related expenses include salaries, benefits, and stock-based compensation. Cost of revenue excludes depreciation and amortization related to our quantum computing systems and related software.
Research and development
Research and development expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility and other costs for our research and development functions. Unlike a standard computer, design and development efforts continue throughout the useful life of our quantum computing systems to ensure proper calibration and optimal functionality. Research and development expenses also include purchased hardware and software costs related to quantum computing systems constructed for research purposes that are not probable of providing future economic benefit and have no alternate future use as well as costs associated with third-party research and development arrangements.
Sales and marketing
Sales and marketing expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, costs for direct advertising, marketing and promotional expenditures and allocated facility and other costs for our sales and marketing functions. We expect to continue to make the necessary sales and marketing investments to enable us to increase our market penetration and expand our customer base.
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General and administrative
General and administrative expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility and other costs for our corporate, executive, finance, and other administrative functions. General and administrative expenses also include expenses for outside professional services, including legal, auditing and accounting services, recruitment expenses, information technology, travel expenses and certain non-income taxes, insurance, and other administrative expenses.
We expect our general and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, NYSE, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services. As a result, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of total revenue over time.
Depreciation and amortization
Depreciation and amortization expense results from depreciation and amortization of our property and equipment, including our quantum computing systems, and intangible assets that is recognized over their estimated lives.
Nonoperating Costs and Expenses
Change in fair value of warrant liabilities
The change in fair value of warrant liabilities consists of mark-to-market fair value adjustments recorded associated with the public and private placement warrants assumed as part of the Business Combination.
Interest income, net
Interest income, net consists of income earned on our money market funds and other available-for-sale investments.
Offering costs associated with warrants
Offering costs associated with warrants consist of transaction costs that have been allocated to the public and private warrants and were expensed upon consummation of the Business Combination on September 30, 2021, based on the relative fair value of the equity issued and the liability-classified warrants.
Other income (expense), net
Other income (expense), net consists of realized losses on our available-for-sale investments and certain other expenses.
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Results of Operations
The following table sets forth our statements of operations for the periods indicated:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Revenue | $ | 11,131 | $ | 2,099 | ||||
| Costs and expenses: | ||||||||
| Cost of revenue (excluding depreciation and amortization)(1) | 2,944 | 1,040 | ||||||
| Research and development(1) | 43,978 | 20,228 | ||||||
| Sales and marketing(1) | 8,385 | 3,233 | ||||||
| General and administrative(1) | 35,966 | 13,737 | ||||||
| Depreciation and amortization | 5,604 | 2,548 | ||||||
| Total operating costs and expenses | 96,877 | 40,786 | ||||||
| Loss from operations | (85,746 | ) | (38,687 | ) | ||||
| Change in fair value of warrant liabilities | 30,136 | (63,332 | ) | |||||
| Interest income, net | 7,093 | 64 | ||||||
| Offering costs associated with warrants | — | (4,259 | ) | |||||
| Other income (expense), net | 6 | 28 | ||||||
| Loss before benefit for income taxes | (48,511 | ) | (106,186 | ) | ||||
| Benefit for income taxes | — | — | ||||||
| Net loss | $ | (48,511 | ) | $ | (106,186 | ) |
| Column 1 | Column 2 |
|---|---|
| (1) | Cost of revenue, research and development, sales and marketing, and general and administrative expenses for the periods include stock-based compensation expense as follows: |
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2022 | 2021 | ||||||
| (in thousands) | |||||||
| Cost of revenue | $ | 902 | $ | 62 | |||
| Research and development | 13,472 | 2,841 | |||||
| Sales and marketing | 1,298 | 67 | |||||
| General and administrative | 15,784 | 4,778 |
Comparison of the Years Ended December 31, 2022 and 2021
Revenue
| Year Ended December 31, | $ Change | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue | $ | 11,131 | $ | 2,099 | $ | 9,032 | 430 | % |
Revenue increased by $9.0 million, or 430%, to $11.1 million for the year ended December 31, 2022, from $2.1 million for the year ended December 31, 2021. The increase was primarily driven by new revenue contracts under which we provided services during the year ended December 31, 2022, an increase in revenue from our cloud service providers and an increase in revenue from services provided under our contract with UMD, as well as other existing contracts.
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Cost of revenue
| Year Ended December 31, | $ Change | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| (in thousands) | ||||||||||||||||
| Cost of revenue (excluding depreciation and amortization) | $ | 2,944 | $ | 1,040 | $ | 1,904 | 183 | % |
Cost of revenue increased by $1.9 million, or 183%, to $2.9 million for the year ended December 31, 2022, from $1.0 million for the year ended December 31, 2021. The increase was driven primarily by the increase in costs to service contracts for the year ended December 31, 2022, including an increase in labor costs to service consulting arrangements.
Research and development
| Year Ended December 31, | $ Change | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| (in thousands) | ||||||||||||||||
| Research and development | $ | 43,978 | $ | 20,228 | $ | 23,750 | 117 | % |
Research and development expense increased by $23.8 million, or 117%, to $44.0 million for the year ended December 31, 2022, from $20.2 million for the year ended December 31, 2021. The increase was primarily driven by an $18.1 million increase in payroll-related expenses, including stock-based compensation of $10.6 million, as a result of increased headcount, a $2.6 million increase in materials, supplies and equipment costs, and a $2.3 million increase in professional service costs to support research and development initiatives.
Sales and marketing
| Year Ended December 31, | $ Change | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| (in thousands) | ||||||||||||||||
| Sales and marketing | $ | 8,385 | $ | 3,233 | $ | 5,152 | 159 | % |
Sales and marketing expense increased by $5.2 million, or 159%, to $8.4 million for the year ended December 31, 2022, from $3.2 million for the year ended December 31, 2021. The increase was primarily due to an increase of $3.7 million of payroll-related expenses, including an increase in stock-based compensation of $1.2 million, as a result of increased headcount, and increased costs to promote our services and other marketing initiatives of approximately $1.5 million.
General and administrative
| Year Ended December 31, | $ Change | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| (in thousands) | ||||||||||||||||
| General and administrative | $ | 35,966 | $ | 13,737 | $ | 22,229 | 162 | % |
General and administrative expenses increased by $22.2 million, or 162%, to $36.0 million for the year ended December 31, 2022, from $13.7 million for the year ended December 31, 2021. The increase was primarily driven by an increase of $14.9 million in payroll-related expenses, including an increase in stock-based compensation of $11.0 million, due to increased headcount, and an increase of $3.4 million in director and
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officer liability insurance costs. The remaining increase is primarily due to additional transition costs incurred to operate as a public company and other general and administrative activities as a result of hiring additional personnel.
Depreciation and amortization
| Year Ended December 31, | $ Change | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| (in thousands) | ||||||||||||||||
| Depreciation and amortization | $ | 5,604 | $ | 2,548 | $ | 3,056 | 120 | % |
Depreciation and amortization expenses increased by $3.1 million, or 120%, to $5.6 million for the year ended December 31, 2022, from $2.5 million for the year ended December 31, 2021. The increase was primarily driven by an increase of $0.7 million due to amortization of capitalized internally developed software and an increase of $1.3 million in depreciation expense associated with capitalized quantum computing system costs, as well as an increase of $1.0 million in depreciation expenses associated with other property and equipment.
Change in fair value of warrant liabilities
| Year Ended December 31, | $ Change | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| (in thousands) | ||||||||||||||||
| Change in fair value of warrant liabilities | $ | 30,136 | $ | (63,332 | ) | $ | 93,468 | 148 | % |
The change in fair value of warrant liabilities increased by $93.5 million, or 148%, to a gain of $30.1 million for the year ended December 31, 2022, from a loss of $63.3 million for the year ended December 31, 2021. The increase was primarily due to mark-to-market income adjustments recorded for the public and private warrants assumed as part of the Business Combination.
Interest income, net
| Year Ended December 31, | $ Change | % Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | ||||||||||||||
| (in thousands) | |||||||||||||||
| Interest income, net | $ | 7,093 | $ | 64 | $ | 7,029 | NM |
NM-Not meaningful
Interest income, net increased by $7.0 million to $7.1 million for the year ended December 31, 2022, from $0.1 million for the year ended December 31, 2021. The increase was primarily driven by interest income earned on our cash equivalents and available-for-sale investments from the investment of the proceeds from the Business Combination.
Offering costs associated with warrants
| Year Ended December 31, | $ Change | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| (in thousands) | ||||||||||||||||
| Offering costs associated with warrants | $ | — | $ | (4,259 | ) | $ | 4,259 | 100 | % |
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Offering costs associated with warrants decreased by $4.3 million, or 100%, to zero for the year ended December 31, 2022, from $4.3 million for the year ended December 31, 2021. In connection with the Business Combination, $4.3 million of transaction costs were allocated and expensed related to the liability-classified public and private warrants.
Liquidity and Capital Resources
As of December 31, 2022, we had cash, cash equivalents and available-for-sale securities of $537.8 million. Excluded from our available liquidity is $2.0 million of restricted cash, which is recorded in other noncurrent assets in our consolidated balance sheets. We believe that our cash, cash equivalents and investments as of December 31, 2022, will be sufficient to meet our working capital and capital expenditure needs for the next 12 months. We believe we will meet longer term expected future cash requirements and obligations through a combination of cash flows from operating activities and available funds from our cash, cash equivalents and investment balances. However, this determination is based upon internal projections and is subject to changes in market and business conditions. We have incurred significant losses since our inception and as of December 31, 2022, we had an accumulated deficit of $194.3 million. During the year ended December 31, 2022, we incurred net losses of $48.5 million. We expect to incur significant losses and higher operating expenses for the foreseeable future.
Future Funding Requirements
We expect our principal sources of liquidity will continue to be our cash, cash equivalents and investments and any additional capital we may obtain through additional equity or debt financings. Our future capital requirements will depend on many factors, including investments in growth and technology. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, services, and technologies, which may require us to seek additional equity or debt financing.
Upon the closing of the Business Combination, we received approximately $636.0 million of gross proceeds. The proceeds are invested in money market funds, commercial paper, corporate and municipal notes and bonds, and other U.S. government and agency securities as disclosed in Note 4 in our consolidated financial statements. We expect to use these investments to fund our strategic operations.
Our primary uses of cash and investments are to fund our operations as we continue to grow our business. We require a significant amount of cash for expenditures as we invest in ongoing research and development and commercialization of our products. Until such time as we can generate significant revenue from commercializing our quantum computing technology, if ever, we expect to finance our liquidity needs through our cash, cash equivalents and investments, as well as equity or debt financings or other capital sources, including potential collaborations and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Rising interest and inflation rates present a recent challenge impacting the U.S. economy and could make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the future. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our quantum computing technology on terms that may not be favorable to us and/or may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our quantum computing development efforts. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors.”
Other than operating expenses and our continued investment in our quantum computers, cash requirements for fiscal year 2023 are expected to consist primarily of capital expenditures for corporate facilities.
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Our material cash requirements as of December 31, 2022, include operating lease commitments, including the lease of our headquarters in College Park, Maryland and manufacturing and office space in Bothell, Washington. As of December 31, 2022, we have total operating lease obligations of $16.1 million, with $0.7 million payable within 12 months.
Cash flows
The following table summarizes our cash flows for the period indicated:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Net cash used in operating activities | $ | (44,698 | ) | $ | (26,537 | ) | ||
| Net cash used in investing activities | (309,056 | ) | (213,785 | ) | ||||
| Net cash provided by financing activities | 1,096 | 603,227 |
Cash flows from operating activities
Our cash flows from operating activities are significantly affected by the growth of our business, primarily related to research and development, sales and marketing, and general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities.
Net cash used in operating activities during year ended December 31, 2022, was $44.7 million, resulting primarily from a net loss of $48.5 million, adjusted for non-cash activity, primarily related to the gain recorded as a result of mark-to-market activity for our public warrants offset by stock-based compensation and other working capital activities. The increase in net cash used in operations from the prior year period was primarily related to increased research and development activities, increased compensation costs as a result of hiring personnel and increased costs incurred as a public company.
Net cash used in operating activities during the year ended December 31, 2021, was $26.5 million, resulting primarily from a net loss of $106.2 million, adjusted for non-cash activity, primarily related to the loss recorded as a result of mark-to-market activity for our public and private warrants, stock-based compensation and offering costs associated with warrants, as well as other working capital activities.
Cash flows from investing activities
Net cash used in investing activities during the year ended December 31, 2022, was $309.1 million, primarily resulting from purchases of available-for-sale securities of $605.7 million, additions of $9.3 million to property and equipment primarily related to the development of our quantum computing systems, offset by cash received from sales and maturities of available-for-sale investments of $310.0 million.
Net cash used in investing activities during the year ended December 31, 2021, was $213.8 million, primarily resulting from purchases of available-for-sale securities of $203.8 million, additions of $7.8 million to property and equipment primarily related to the development of our quantum computing systems, $1.6 million of capitalized internal software development costs, and $0.6 million of intangible asset acquisition costs.
Cash flows from financing activities
Net cash provided by financing activities during the year ended December 31, 2022, was $1.1 million, primarily resulting from proceeds from stock options exercised.
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Net cash provided by financing activities during the year ended December 31, 2021, was $603.2 million primarily reflecting proceeds received from the Business Combination, including the PIPE investment, as well as cash received from the exercise of warrants and exercise of stock options.
Critical Accounting Estimates
This discussion and analysis of financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. We also make estimates and assumptions on revenue generated and reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies are described in greater detail in Note 2 to our audited consolidated financial statements included in this Annual Report.
Critical accounting estimates are defined as those reflective of significant judgments, estimates and uncertainties, which may result in materially different results under different assumptions and conditions. We have listed below our critical accounting estimates that we believe to have the greatest potential impact on our consolidated financial statements. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results.
Revenue recognition
We derive revenue from our QCaaS arrangements, consulting services related to co-developing algorithms on our quantum computing systems, and from contracts associated with the design, development, and construction of specialized quantum computing systems together with related services.
We have applied judgment in determining that our QCaaS contracts represent a combined, stand-ready performance obligation to provide access to our quantum computing systems together with related maintenance and support. For arrangements with multiple performance obligations, judgment is used to determine whether multiple services in the contract should be accounted for separately or as a group. Judgment is also applied when determining the relative standalone selling price of each performance obligation, including determining when to apply the residual method, as this is used to allocate the transaction price to each performance obligation within the contract. We determine standalone selling price based on the observable price of a product or service when we sell the products or services separately in similar circumstances and to similar customers. When the standalone selling price is not known, due to it being either highly variable or uncertain, we allocate the transaction price using the residual approach. In addition, we apply judgment in evaluating any consideration payable to the customer and whether it is in exchange for distinct goods or services or should be reflected as a reduction of revenue.
For arrangements where we enter into multiple contracts with a single counterparty at or near the same time, we use judgment in determining whether the contracts should be combined and whether we should account for them as a single contract. We account for them as a single contract when one or more of the following criteria are met: (i) the contracts are negotiated as a package with a single commercial objective; (ii) consideration to be paid in one contract depends on the price or performance of the other contract; and (iii) goods or services promised are a single performance obligation.
Contracts with customers are evaluated at the time of execution and may vary in terms. The amount of revenue recognized in a period may vary with respect to the allocation of arrangement consideration to performance obligations with different revenue recognition patterns and changes to existing contract terms.
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Quantum computing systems
Quantum computing systems are included within property and equipment, net on the consolidated balance sheet. Prior to 2019, we built certain quantum computing systems solely for research and development purposes and these quantum computing systems were deemed to have no alternative future use. In 2019, we began to commercialize our quantum computing systems via the offering of QCaaS and quantum computing systems built thereafter were determined to provide a probable future economic benefit. As a result, hardware and labor costs associated with the building of such quantum computing systems were capitalized in the period the costs were incurred. Costs to maintain quantum computing systems are expensed as incurred.
Judgment is used to determine when hardware and labor costs incurred for our quantum computing systems should be capitalized as a result of our assessment of whether the system will provide a probable future economic benefit and whether or not the costs represent activities necessary to build the systems, maintain the systems or to perform certain research and development functions. Judgment is also used to determine when the systems are placed into service and the estimated useful life of the associated systems.
Changes in these estimates can have a significant impact on the assessment of capitalized costs, which could result in material changes to reported property and equipment, net. The amount of depreciation expense associated with the quantum computing systems may also vary based on the estimated useful life.
Capitalized internally developed software
Capitalized internally developed software, which is included in intangible assets, net, on the consolidated balance sheet, consists of costs to purchase and develop internal-use software, which we use to provide services to our customers.
Judgment is used to determine when costs to develop internal-use software for a specific project should be capitalized and whether or not the costs represent activities necessary to enhance the functionality of the software or maintain the performance of the software, and whether it is considered probable that the software will be used to perform the function intended. Judgment is also used to determine when the software is available for use as well as the estimated useful life of the software.
The assumptions used to capitalize internally developed software costs consider when the preliminary project stage is completed, whether the software will perform the function intended, and whether the development activities enhance the functionality of the software or maintain the performance of the software. Changes in these estimates can have a significant impact on the assessment of capitalized costs, which could result in material changes to reported intangible assets, net. The amortization of capitalized internally developed software may also be impacted by the estimated useful life associated with these intangible assets.
Impairment of long-lived assets
Long-lived assets, such as our quantum computing systems and capitalized internally developed software, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
As of December 31, 2022, we did not have an impairment of any long-lived assets. In determining whether a potential impairment exists, judgment is used in determining the level at which the assessment is made. We have determined that the company consists of one entity-wide asset group for purposes of assessing whether a triggering event has occurred that would indicate the long-lived asset group’s carrying value is not recoverable. Impairment calculations, if necessary, contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. Key assumptions used in estimating future cash flows and asset fair values include projected revenue growth and operating expenses, as well as forecasting asset useful lives and selecting an appropriate discount rate with respect to any terminal value cash flows.
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Triggering events occur when there are indicators that the carrying value of a long-lived asset may not be recoverable. These indicators may include internal and external economic factors, including significant decrease in market price of our capital stock, adverse market conditions, and an adverse change in the manner of which the asset is used. The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections consistent with our operating strategy including the pace of technological change or specific technological challenges in building our quantum computing systems. Changes in these estimates can have a significant impact on the assessment of fair value, which could result in material impairment losses.
Emerging Growth Company Status and Smaller Reporting Company Status
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. During the extended transition period, it may be difficult or impossible to compare our financial results with the financial results of another public company that complies with public company effective dates for accounting standard updates because of the potential differences in accounting standards used.
We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (c) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three-year period.
We are also a smaller reporting company as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.