IonQ, Inc. (IONQ) FY 2024 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,” “could,” 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 subsidiaries after the consummation of the Business Combination. References to “dMY” refer to the predecessor company prior to the consummation of the Business Combination.
This section provides an analysis of our financial condition and results of operations for the year ended December 31, 2024, compared to the year ended December 31, 2023. A discussion of our financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 can be found under Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2023, filed on February 28, 2024, which is available free of charge on the SEC's website at www.sec.gov and our investor relations website at investors.ionq.com.
Overview
We are developing quantum computers and networks 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 specialized quantum computing and networking hardware together with related maintenance and support. We also 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, Amazon Web Services’ (“AWS”) 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 quantum-computing-as-a-service (“QCaaS”).
We supplement our offerings with professional services focused on assisting our customers in applying quantum computing and networking to their businesses. We also expect to sell full quantum computing systems to customers, either over the cloud or for local access. We also offer quantum networking products which offer customers secure communication networks and enable networked quantum computing.
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 $331.6 million, $157.8 million and $48.5 million, for the years ended December 31, 2024, 2023 and 2022, respectively. As of December 31, 2024, we had an accumulated deficit of $683.7 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 algorithmic 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
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”). Contemporaneously 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 have been disclosed in the registrant’s periodic reports filed with the SEC.
Impact of the Macroeconomic Climate on Our Business
Inflationary factors, interest rates and overhead costs may adversely affect our operating results. High 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 future on our operating costs, including due to supply chain constraints, consequences associated with bank failures, geopolitical tensions in and around Ukraine, Israel and other areas of the world, 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 derive revenue from contracts associated with the design, development, construction and sale of specialized quantum computing hardware together with related maintenance and support, from contracts providing access to QCaaS, and from consulting services related to co-developing algorithms on quantum computing systems.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.
Certain of our contracts contain multiple performance obligations, most commonly in contracts for the sale of specialized quantum computing hardware 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. Certain products and services have limited or no history of being sold on a standalone basis, requiring us to estimate the standalone selling price. To date, we have estimated the standalone selling price based on other contracts for similar products and services adjusted for differing terms than the contract being evaluated, as well as internal pricing guidelines and market factors. In addition, we take into consideration the estimated costs to be incurred to satisfy the performance obligation plus an appropriate profit margin. In limited situations, for certain contracts executed in prior years, when the standalone selling price was not known, due to it being either highly variable or uncertain, we allocated the transaction price using the residual approach. Estimates related to standalone selling price have not had a material impact on revenue recognized in recent periods.
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 consists of 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. For performance obligations related to providing QCaaS access, fixed fees are recognized on a straight-line basis over the access period. Variable usage fees are recognized in the period they occur. We have determined that contracts that contain consulting 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.
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. For performance obligations related to specialized quantum computing hardware and consulting services, revenue is recognized over time based on the efforts incurred to date relative to the total expected effort, primarily based on a cost-to-cost input measure. We apply judgment to determine a reasonable method to measure progress and to estimate total expected effort. Factors considered in these estimates include our historical performance, the availability, productivity and cost of labor, the nature and complexity of work to be performed, the effect of change orders, availability and cost of materials and the effect of any delays in performance.
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Operating Costs and Expenses
Cost of revenue
Cost of revenue primarily consists of expenses related to construction of specialized quantum computing hardware and delivery of our services, including personnel-related expenses, hardware costs, allocated overhead 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 overhead 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 a 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, commissions, benefits and stock-based compensation, costs for direct advertising, marketing and promotional expenditures and allocated overhead 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.
General and administrative
General and administrative expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated overhead 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, 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 our support functions with the growth of our business.
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 are recognized over their estimated lives.
Nonoperating Costs and Expenses
Gain (loss) on change in fair value of warrant liabilities
The gain (loss) on change in fair value of warrant liabilities consists of mark-to-market fair value adjustments recorded associated with the public 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.
Other income (expense), net
Other income (expense), net consists of gains and losses that arise from fluctuations in foreign currency exchange rates and certain other nonoperating expenses.
Income tax benefit (expense)
Income tax expense consists of income taxes related to foreign jurisdictions in which we conduct business.
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Results of Operations
The following table sets forth our consolidated statements of operations for the periods indicated:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Revenue | $ | 43,073 | $ | 22,042 | ||||
| Costs and expenses: | ||||||||
| Cost of revenue (excluding depreciation and amortization)(1) | 20,597 | 8,108 | ||||||
| Research and development(1) | 136,827 | 92,321 | ||||||
| Sales and marketing(1) | 28,395 | 18,270 | ||||||
| General and administrative(1) | 71,055 | 50,722 | ||||||
| Depreciation and amortization | 18,654 | 10,375 | ||||||
| Total operating costs and expenses | 275,528 | 179,796 | ||||||
| Loss from operations | (232,455 | ) | (157,754 | ) | ||||
| Gain (loss) on change in fair value of warrant liabilities | (117,107 | ) | (19,206 | ) | ||||
| Interest income, net | 18,249 | 19,322 | ||||||
| Other income (expense), net | (275 | ) | (85 | ) | ||||
| Loss before income tax expense | (331,588 | ) | (157,723 | ) | ||||
| Income tax benefit (expense) | (59 | ) | (48 | ) | ||||
| Net loss | $ | (331,647 | ) | $ | (157,771 | ) |
(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, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| (in thousands) | |||||||
| Cost of revenue | $ | 4,740 | $ | 2,819 | |||
| Research and development | 58,696 | 40,103 | |||||
| Sales and marketing | 13,788 | 6,762 | |||||
| General and administrative | 29,654 | 20,059 |
Comparison of the Years Ended December 31, 2024 and 2023
Revenue
| Year Ended December 31, | $ | % | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue | $ | 43,073 | $ | 22,042 | $ | 21,031 | 95 | % |
Revenue increased by $21.0 million, or 95%, to $43.1 million for the year ended December 31, 2024, from $22.0 million for the year ended December 31, 2023 . The increase was primarily driven by progress on our arrangements to build specialized quantum computing hardware, as well as new revenue contracts under which we provided services during the year ended December 31, 2024.
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Cost of revenue
| Year Ended December 31, | $ | % | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Cost of revenue (excluding depreciation and amortization) | $ | 20,597 | $ | 8,108 | $ | 12,489 | 154 | % |
Cost of revenue increased by $12.5 million, or 154%, to $20.6 million for the year ended December 31, 2024, from $8.1 million for the year ended December 31, 2023. The increase was driven primarily by an increase in hardware costs used in the construction of specialized quantum computing hardware, as well as an increase in labor costs to service contracts, for the year ended December 31, 2024.
Research and development
| Year Ended December 31, | $ | % | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Research and development | $ | 136,827 | $ | 92,321 | $ | 44,506 | 48 | % |
Research and development expense increased by $44.5 million, or 48%, to $136.8 million for the year ended December 31, 2024, from $92.3 million for the year ended December 31, 2023. The increase was primarily driven by an increase of $33.7 million in payroll-related expenses, including an increase in stock-based compensation of $18.1 million, as a result of increased headcount and new equity grants, and a $5.0 million increase in materials, supplies and equipment costs. The remaining increase is due to an increase in costs to support research and development initiatives, including a $1.9 million increase in professional service fees and a $2.3 million increase in allocated overhead costs.
Sales and marketing
| Year Ended December 31, | $ | % | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Sales and marketing | $ | 28,395 | $ | 18,270 | $ | 10,125 | 55 | % |
Sales and marketing expense increased by $10.1 million, or 55%, to $28.4 million for the year ended December 31, 2024, from $18.3 million for the year ended December 31, 2023. The increase was primarily driven by an increase of $10.0 million of payroll-related expenses, including an increase in stock-based compensation of $7.0 million, as a result of increased headcount and new equity grants.
General and administrative
| Year Ended December 31, | $ | % | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| General and administrative | $ | 71,055 | $ | 50,722 | $ | 20,333 | 40 | % |
General and administrative expenses increased by $20.3 million, or 40%, to $71.1 million for the year ended December 31, 2024, from $50.7 million for the year ended December 31, 2023. The increase was primarily driven by an increase of $21.4 million of payroll-related expenses, including a $10.0 million cash incentive award for the Company's chief executive officer and an increase in stock-based compensation of $9.6 million, offset by decreases of $0.6 million in professional service fees and allocated overhead costs and $0.5 million in director and officer liability insurance costs.
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Depreciation and amortization
| Year Ended December 31, | $ | % | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Depreciation and amortization | $ | 18,654 | $ | 10,375 | $ | 8,279 | 80 | % |
Depreciation and amortization expenses increased by $8.3 million, or 80%, to $18.7 million for the year ended December 31, 2024, from $10.4 million for the year ended December 31, 2023. The increase was primarily driven by an increase of $3.1 million and $2.8 million in depreciation expense associated with capitalized quantum computing system costs and other property and equipment, respectively, and an increase of $2.4 million due to amortization of capitalized internal-use software.
Gain (loss) on change in fair value of warrant liabilities
| Year Ended December 31, | $ | % | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Gain (loss) on change in fair value of warrant liabilities | $ | (117,107 | ) | $ | (19,206 | ) | $ | (97,901 | ) | (510 | )% |
The change in fair value of warrant liabilities decreased by $97.9 million, or 510%, to a loss of $117.1 million for the year ended December 31, 2024, from a loss of $19.2 million for the year ended December 31, 2023. The decrease was due to mark-to-market adjustments based on changes in the trading price for our public warrants.
Interest income, net
| Year Ended December 31, | $ | % | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | Change | |||||||||||||
| (in thousands) | ||||||||||||||||
| Interest income, net | $ | 18,249 | $ | 19,322 | $ | (1,073 | ) | (6 | )% |
Interest income, net decreased by $1.1 million, or 6%, to $18.2 million for the year ended December 31, 2024, from $19.3 million for the year ended December 31, 2023. The decrease was primarily driven by a decrease in the available-for-sale investments balance, offset by higher interest rates.
Liquidity and Capital Resources
As of December 31, 2024, we had cash, cash equivalents and available-for-sale securities of $363.8 million. Excluded from our available liquidity is $2.4 million of restricted cash, which is primarily recorded in other noncurrent assets in our consolidated balance sheets. We believe that our cash, cash equivalents and investments as of December 31, 2024, 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, 2024, we had an accumulated deficit of $683.7 million. During the year ended December 31, 2024, we incurred net losses of $331.6 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.
Our primary uses of cash and investments are to fund our operations as we continue to grow our business and our investing activities, including capital expenditures and potential acquisitions. 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 and networking technology, if ever, we expect to finance our liquidity needs
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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. 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 and networking 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 and networking 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.”
Our material contractual commitments as of December 31, 2024, primarily relate to operating lease commitments. As of December 31, 2024, we have total operating lease obligations of $21.9 million, with $3.7 million payable within 12 months. Other than operating lease commitments, cash requirements for fiscal year 2025 are expected to consist primarily of operating expenses and continued investment in our quantum computers.
Cash flows
The following table summarizes our cash flows for the period indicated:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| (in thousands) | ||||||||||||
| Net cash provided by (used in) operating activities | $ | (105,683 | ) | $ | (78,811 | ) | $ | (44,698 | ) | |||
| Net cash provided by (used in) investing activities | 82,730 | 68,766 | (309,056 | ) | ||||||||
| Net cash provided by (used in) financing activities | 41,687 | 1,761 | 1,096 |
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 the year ended December 31, 2024, was $105.7 million, resulting primarily from a net loss of $331.6 million, adjusted for non-cash activity, primarily related to stock-based compensation, the loss recorded as a result of mark-to-market activity for our public warrants, depreciation and amortization, 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 and increased compensation costs.
Net cash used in operating activities during the year ended December 31, 2023, was $78.8 million, resulting primarily from a net loss of $157.8 million, adjusted for non-cash activity, primarily related to stock-based compensation, the loss recorded as a result of mark-to-market activity for our public warrants, depreciation and amortization, and other working capital activities.
Cash flows from investing activities
Net cash provided by investing activities during the year ended December 31, 2024, was $82.7 million, primarily resulting from cash received from maturities of available-for-sale securities of $418.1 million, offset by purchases of available-for-sale securities of $296.3 million, additions of $18.0 million to property and equipment primarily related to leasehold improvements, the development of our quantum computing systems, and other supporting equipment, cash paid of $15.5 million for businesses acquired, and additions of $3.9 million related to capitalized software development costs.
Net cash provided by investing activities during the year ended December 31, 2023, was $68.8 million, primarily resulting from maturities of available-for-sale securities of $386.8 million, offset by purchases of available-for-sale securities of $298.4 million, additions of $13.7 million to property and equipment primarily related to the development of our quantum computing systems, and additions of $4.6 million related to capitalized software development costs.
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Cash flows from financing activities
Net cash provided by financing activities during the year ended December 31, 2024, was $41.7 million, primarily resulting from proceeds from warrants and stock options exercised.
Net cash provided by financing activities during the year ended December 31, 2023, was $1.8 million, primarily resulting from proceeds from stock options exercised.
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 consolidated 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 contracts associated with the design, development, construction and sale of specialized quantum computing hardware together with related maintenance and support, from contracts providing access to QCaaS, and from consulting services related to co-developing algorithms on quantum computing systems.
For arrangements with multiple performance obligations, judgment is applied to determine the relative standalone selling price of each performance obligation 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. Certain products and services have limited or no history of being sold on a standalone basis, requiring us to estimate the standalone selling price. To date, we have estimated the standalone selling price based on other contracts for similar products and services adjusted for differing terms than the contract being evaluated, as well as internal pricing guidelines and market factors. In addition, we take into consideration the estimated costs to be incurred to satisfy the performance obligation plus an appropriate profit margin. In limited situations, for certain contracts executed in prior years, when the standalone selling price was not known, due to it being either highly variable or uncertain, we allocated the transaction price using the residual approach. Estimates related to standalone selling price in recent contracts did not have a material impact on revenue recognized.
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.
For certain contracts, revenue is recognized over time based on the efforts incurred to date relative to the total expected effort, primarily based on a cost-to-cost input measure. We apply judgment to determine a reasonable method to measure progress and to estimate total expected effort. Factors considered in these estimates include our historical performance, the availability, productivity and cost of labor, the nature and complexity of work to be performed, the effect of change orders, availability and cost of materials and the effect of any delays in performance. Changes in these estimates can have a significant impact on revenue recognition, which could result in material changes to reported revenue.
Quantum computing systems
Quantum computing systems are included within property and equipment, net on the consolidated balance sheets. Hardware and labor costs associated with the building of such quantum computing systems are capitalized in the period the costs are incurred. Costs to maintain quantum computing systems are expensed as incurred.
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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.
We also estimate the useful life of our quantum computing systems, both at the time the assets are placed in service and periodically whenever events or changes in circumstances indicate that the useful life may have changed. In assessing useful lives, we consider, among other factors, the use of the asset, changes in technology, and the competitive environment. Changes in these estimates can have a significant impact on the assessment of capitalized costs and depreciation expense, which could result in material changes to reported property and equipment, net.