# D-Wave Quantum Inc. (QBTS) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from D-Wave Quantum Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1907982/000190798224000049/qbts-20231231.htm
Accession: 0001907982-24-000049
Filing date: 2024-03-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/QBTS/
All MD&A years: /company/QBTS/mda/
Previous year: /company/QBTS/mda/fy2022/ (FY 2022)
Next year: /company/QBTS/mda/fy2024/ (FY 2024)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes included elsewhere in this Form 10-K. The following discussion contains forward-looking statements based upon current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those risk factors applicable to D-Wave and its business referenced under the section titled “Risk Factors” elsewhere in this Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. In this section, unless otherwise specified, the terms “we”, “our”, “us”, D-Wave" or the "Company" refer to D-Wave Quantum Inc. and its subsidiaries following the Closing while "D-Wave Systems" refers to D-Wave Systems Inc. prior to the Closing. All other capitalized terms have the meanings ascribed thereto elsewhere in this Form 10-K. All dollar amounts are expressed in thousands of United States dollars (“$”), unless otherwise indicated.

58

Overview

On February 7, 2022, D-Wave Systems entered into the Transaction Agreement with DPCM, D-Wave, Merger Sub, CallCo, and ExchangeCo, pursuant to which, among other things: (a) Merger Sub merged with and into DPCM, with DPCM surviving as a direct, wholly-owned subsidiary of D-Wave, (b) D-Wave indirectly acquired all of the outstanding share capital of D-Wave Systems and D-Wave Systems became an indirect subsidiary of D-Wave, with D-Wave becoming a public company and an SEC registrant as successor to DPCM (the "Merger").

D-Wave was incorporated as a corporation organized and existing under the DGCL on January 24, 2022. The Company was formed for the purpose of effecting a merger between DPCM, D-Wave, and certain other affiliated entities through a series of transactions constituting the Merger pursuant to the Transaction Agreement. The closing of the Merger occurred on August 5, 2022 and is herein referred to as “the Closing.”

On the date of the Closing, DPCM and D-Wave Systems became wholly-owned subsidiaries of, and are operated, by D-Wave. Upon the completion of the Merger, D-Wave succeeded to all of the operations of its predecessor, D-Wave Systems.

Following the Closing, the Common Shares and Warrants of D-Wave commenced trading on the NYSE under the ticker symbols “QBTS” and “QBTS.WT,” respectively.

We are a commercial quantum computing company that provides customers with a full suite of professional services and web-based access to our superconducting quantum computer systems and integrated software environment through our cloud service, LeapTM. Historically, we have developed our own annealing superconducting quantum computer and associated software, and our current generation quantum system is the D-Wave AdvantageTM. We are a leader in the development and delivery of quantum computing systems, software and services, and we are the world’s first commercial supplier of quantum computers—and the only company developing both annealing quantum computers and gate-model quantum computers. During the year ended December 31, 2022, we initiated the development of a gate-model quantum computing system.

Our business model is focused primarily on generating revenue from providing customers access to our quantum computing systems via the cloud in the form of QCaaS products, and from providing professional services wherein we assist our customers in identifying and implementing quantum computing applications. We have three operating facilities, which we lease, in North America. These facilities are located in Burnaby, British Columbia, Richmond, British Columbia, and Palo Alto, California.

During the years ended December 31, 2023 and 2022, we generated revenue totaling $8.8 million and $7.2 million, respectively. We have incurred significant operating losses since inception. For the years ended December 31, 2023 and 2022, our net losses were $82.7 million and $53.7 million, respectively. We expect to continue to incur significant losses for the foreseeable future as we continue to invest in a number of research and development programs as well as a variety of go-to-market initiatives. As of December 31, 2023, we had an accumulated deficit of $483.1 million.

The Transaction Agreement and PIPE Financing

As noted above, the Merger pursuant to the Transaction Agreement was consummated on August 5, 2022. While the legal acquirer in the Transaction Agreement is D-Wave Quantum Inc., for financial accounting and reporting purposes under GAAP, D-Wave Systems is the accounting acquirer and the Merger is accounted for as a “reverse recapitalization.” A reverse recapitalization does not result in a new basis of accounting and the financial statements of D-Wave represent the continuation of our financial statements in many respects. Under this method of accounting, DPCM is treated as the “acquired” company for financial reporting purposes. For accounting purposes, D-Wave Systems will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of D-Wave Systems (i.e., a capital transaction involving the issuance of stock by D-Wave Quantum Inc. for the stock of D-Wave Systems Inc.).

As a result of the Merger, all of the shares of D-Wave Systems common stock issued and outstanding immediately prior to the closing of the Merger (including D-Wave Systems common shares resulting from D-Wave Systems preferred stock conversion) were converted into an aggregate of 99,736,752 Common Shares (including Exchangeable Shares). Additionally, all of the shares of DPCM Class A Common Stock and Class B Common Stock held by DPCM issued and outstanding immediately prior to the Closing were converted into an aggregate of 4,327,512 Common Shares. Upon consummation of the Merger, the most significant change in our reported financial position and results of operations was an increase in cash of $49.0 million in gross proceeds from the Merger and PIPE Financing netted against transaction costs of approximately $14.2 million.

59

In connection with the Merger, approximately 29.1 million shares of DPCM Class A Common Stock were redeemed, which represented a significant portion of the publicly traded shares of DPCM outstanding immediately prior to the Merger and resulted in only approximately $9.0 million of cash from the DPCM Trust Account becoming available to us. As discussed elsewhere in this Form 10-K, we entered into the Purchase Agreement, pursuant to which Lincoln Park agreed to purchase up to $150.0 million of Common Shares through the Purchase Agreement (subject to certain limitations contained in the Purchase Agreement) from time to time over a 36-month period, to assist us in meeting our capital requirements. However, we may not sell any Common Shares to Lincoln Park unless and until the price of our Common Shares subsequently exceeds the Floor Price of $1.00.

Common Shares that may be resold into the public markets pursuant to the Purchase Agreement could have a significant negative impact on the trading price of our Common Shares.

We have also filed the Resale Registration Statement registering the issuance to and/or resale by certain third parties unrelated to the Purchase Agreement of certain securities issued prior to, or in connection with, the Merger. The Common Shares registered for resale from time to time pursuant to the Resale Registration Statement represent a substantial majority of the number of the Common Shares outstanding as of December 31, 2023. The shareholders selling pursuant to the Resale Registration Statement will determine the timing, pricing and rate at which they sell such Common Shares into the public market and such sales could have a significant negative impact on the trading price of our Common Shares. In addition, PSP, a beneficial owner of approximately 37% of our outstanding Common Shares (including Common Shares underlying Exchangeable Shares) as of December 31, 2023, has registration rights with respect to all of its 55,068,914 shares not registered on the Resale Registration Statement, and, since its lock-up period has concluded, may sell such shares either pursuant to a future registration statement or once Rule 144 under the Securities Act becomes available for such sales. Although the current trading price of the Common Shares is below $10.00 per share, certain of the investors who have resale rights under the Resale Registration Statement have an incentive to sell because they purchased Common Shares and/or Warrants at prices below those offered in DPCM's IPO. Sales by such investors may cause the trading prices of our securities to experience a further decline. As the trading price of our Common Shares has declined, sales of Common Shares to Lincoln Park pursuant to the Purchase Agreement have become a less attractive source of capital. In addition, we may be unable to raise capital at rates that would be possible if the trading price of our Common Shares was higher.

As a result of the Merger, we became subject to the reporting requirements under the Exchange Act and listing standards of the NYSE, which has required us to hire additional personnel and implement procedures and processes to address applicable regulatory requirements and customary practices. We expect D-Wave will incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit, legal, and filing fees.

Our future results of consolidated operations and financial position may not be comparable to historical results as a result of the Merger.

Macroeconomic and Business Environment

Unfavorable conditions in the economy in the United States, Canada and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, banking collapses and related uncertainty, international trade relations, political turmoil, natural catastrophes, outbreaks of contagious diseases, warfare and terrorist attacks on the United States, Europe or elsewhere, including military actions affecting Russia, Ukraine, Israel or elsewhere, could cause a decrease in business investments on our products and negatively affect the growth of our business and our results of operations.

The recent trends towards rising inflation may 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. High interest and inflation rates also present a recent challenge impacting the U.S. and Canadian economies 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 remain high or continue to rise) on our operating costs, including our labor, due to supply chain constraints and employee availability and wage increases, which may result in additional stress on our working capital resources.

60

Key Components of Results of Operations

Revenue

We currently generate our revenue primarily through subscription sales to access our QCaaS cloud platform and professional services related to the development and implementation of quantum computing applications. QCaaS revenue is recognized on a ratable basis over the contract term, which generally ranges from one month to two years. Professional services revenue is recognized over time on a percentage of completion basis using the costs incurred input measure of progress.

We expect that QCaaS revenue, as a percentage of total revenue, will increase due to an increasing number of QCaaS agreements being driven by the completion of professional services engagements yielding production applications that require QCaaS services, as well as by customers that choose to access our Leap cloud service without utilizing our professional services organization.

Cost of Revenue

Our cost of revenue consists of all direct and indirect expenses related to providing our QCaaS offering and delivering our professional services, such as personnel-related expenses, including stock-based compensation, costs associated with maintaining the cloud platform on which we provide the QCaaS product and depreciation and amortization related to our quantum computing systems and related software.

We expect our total cost of revenue to increase in absolute dollars in future periods, corresponding to our anticipated growth in revenue and necessary to support our customers and to maintain the QCaaS cloud offering, operate our quantum computing systems, and to deliver our professional services. We expect our cost of revenue as a

percentage of total revenue to decrease over time due to a higher mix of QCaaS revenue that has a lower cost to deliver compared to professional service revenue.

Operating Expenses

Our operating expenses consist of research and development, general and administrative, and sales and marketing expenses.

Research and Development

Research and development expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation for personnel, fabrication costs, lab supplies, and cloud computing resources and allocated facility 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 components, fabrication and software costs related to quantum computing systems constructed for research purposes that do not have a high probability of providing near-term future economic benefits, and may have no alternate future use. We currently do not capitalize any research and development expenses.

We expect our research and development expenses will increase on an absolute dollar basis for the foreseeable future as we continue to invest in research and development efforts to enhance the performance of our annealing quantum computers, to complete the development of our gate model quantum computer, and to broaden the functionality, improve the reliability, availability and scalability of our QCaaS cloud platform. If in the future we receive government grants and research incentives, which have historically offset a portion of research and development costs, these costs could decrease in absolute dollars.

General and Administrative

General and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation for personnel and outside professional services expenses including legal, audit and accounting services, insurance, other administrative expenses and allocated facility costs for our administrative functions.

We expect our general and administrative expenses to decrease in absolute dollars in the near term due to significant investments in scaling up our ability to operate as a public company made in prior years. However, in future periods we expect general and administrative expenses to increase in absolute dollars as we continue to invest in more comprehensive compliance and governance functions, increased IT security and compliance, and expanded internal controls over financial reporting in accordance with the Sarbanes-Oxley Act.

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Sales and Marketing

Sales and marketing expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation for personnel, direct advertising, marketing and promotional material costs, sales commission expense, consulting fees and allocated facility costs for our sales and marketing functions. We intend to continue to make significant investments in our sales and marketing organization to drive additional revenue, expand our global customer base, and broaden our brand awareness. We expect our sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future.

Results of Operations

The following table sets forth our results of operations for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Comparison of the Year Ended December 31, 2023 and 2022

Revenue

Revenue increased by $1.6 million, or 22%, to $8.8 million for the year ended December 31, 2023 as compared to $7.2 million for the year ended December 31, 2022, with the increase due primarily to an increase of $2.3 million in professional services revenue, primarily driven by an increase in projects that enable our customers to identify and implement applications that leverage our QCaaS cloud platform, offset by a decrease in QCaaS revenue of $0.7 million, due to non-renewal for several customer contracts that were partially replaced with new customer contracts.

Cost of Revenue

Cost of revenue increased by $1.2 million, or 41%, to $4.1 million for the year ended December 31, 2023 as compared to $2.9 million for the year ended December 31, 2022. The increase in cost of revenue was primarily driven by investments made to support a higher volume of services. The cost of revenue increases were primarily comprised of increases in stock-based compensation expenses and personnel costs of $0.9 million and $0.5 million, respectively, offset by decreases in quantum computing infrastructure costs of $0.1 million.

62

Operating Expenses

Research and Development Expenses

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Research and development expenses increased by $5.8 million, or 18%, to $37.9 million for the year ended December 31, 2023 compared to $32.1 million for the year ended December 31, 2022. The increase in research and development expenses was primarily driven by our continuous efforts to broaden the functionality of our QCaaS cloud platform and improve the reliability, availability and scalability of our cloud platform. In particular, the increases were comprised of stock-based compensation expenses, other personnel costs, and fabrication expenses of $5.1 million, $0.5 million, and $0.9 million respectively, and were partly offset by decreases in facilities costs and consulting expenses of $0.6 million and $0.2 million, respectively.

General and Administrative Expenses

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","Amount","","%"],["General and administrative","$","37,014","","","$","21,539","","","$","15,475","","","72","%"]]
[[/GREPCENT_TABLE]]

General and administrative expenses increased by $15.5 million, or 72%, to $37.0 million for the year ended December 31, 2023 as compared to $21.5 million for the year ended December 31, 2022. The increase was driven by investments made to scale up our ability to operate as a public company and was primarily comprised of increases in stock-based compensation expense, other personnel costs, professional fees, insurance costs, and facilities expenses of $8.7 million, $0.8 million, $4.0 million, $1.3 million, and $0.4 million, respectively.

Sales and Marketing Expenses

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","Amount","","%"],["Sales and marketing","$","10,276","","","$","10,068","","","$","208","","","2","%"]]
[[/GREPCENT_TABLE]]

Sales and marketing expenses increased by $0.2 million, or 2%, to $10.3 million for the year ended December 31, 2023 as compared to $10.1 million for the year ended December 31, 2022. The increase was primarily due to increased personnel costs and professional fees of $2.1 million and $0.2 million, respectively, offset by decreased stock-based compensation expenses of $2.0 million.

Other Income (Expense), net

Interest Expense

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","Amount","","%"],["Interest expense","$","(37)","","","$","(2,335)","","","$","2,298","","","(98)","%"]]
[[/GREPCENT_TABLE]]

Interest expense decreased by $2.3 million, or 98%, to $37 thousand for the year ended December 31, 2023 as compared to $2.3 million for the year ended December 31, 2022. The decrease is due to an increase in the benefit from the catch-up method adjustment (see Note 8 to the accompanying consolidated financial statements) on the Company's SIF Loan to $2.9 million from $0.6 million in the comparable period.

63

Change in fair value of Term Loan

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","Amount","","%"],["Change in fair value of Term Loan","$","640","","","$","\u2014","","","$","640","","","n/a"]]
[[/GREPCENT_TABLE]]

Change in Change in fair value of Term Loan increased by $0.6 million for the year ended December 31, 2023 as compared to zero for the year ended December 31, 2022. On April 13, 2023, the Company entered into a Term Loan with PSPIB, providing $50.0 million in aggregate principal amount over three tranches, with the first two tranches, each $15.0 million, disbursed on April 14, 2023, and July 13, 2023, respectively. The Company opted for the fair value option for accounting the Term Loan (See Note 2 to the accompanying consolidated financial statements). Changes in the fair value of the Term Loan, excluding changes due to the Company's own credit risk, are recorded as gains or losses in the Company’s consolidated statements of operations and comprehensive loss in each reporting period. The fair value of the Term Loan varies primarily based on the market yield rate, market yield volatility, probability for an event of default and the probability of the issuance of Common Shares under the Purchase Agreement.

Term Loan debt issuance costs

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","Amount","","%"],["Term Loan debt issuance costs","$","(2,118)","","","$","\u2014","","","$","(2,118)","","","n/a"]]
[[/GREPCENT_TABLE]]

Change in Term Loan debt issuance costs increased by $2.1 million for the year ended December 31, 2023 as compared to zero for the year ended December 31, 2022. As mentioned previously, the Company elected the fair value option for accounting the Term Loan. Under this option, debt issuance costs are recorded in other expenses in the Company’s consolidated statements of operations and comprehensive loss.

Change in fair value of warrant liabilities

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","Amount","","%"],["Change in fair value of warrant liabilities","$","262","","","$","6,173","","","$","(5,911)","","","100","%"]]
[[/GREPCENT_TABLE]]

Change in fair value of warrant liabilities decreased by $5.9 million for the year ended December 31, 2023 as compared to $6.2 million for the year ended December 31, 2022. The fair value of the warrant liabilities varies primarily with the trading price of the Public Warrants listed on the New York Stock Exchange.

Lincoln Park Purchase Agreement issuance costs

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","Amount","","%"],["Lincoln Park Purchase Agreement issuance costs","$","\u2014","","","$","(629)","","","$","629","","","-100","%"]]
[[/GREPCENT_TABLE]]

There were no issuance costs incurred in connection with the Lincoln Park Purchase Agreement during the year ended December 31, 2023.

Other income (expense), net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(In thousands, except percentages)","2023","","2022","","Amount","","%"],["Other income (expense), net","$","(916)","","","$","2,547","","","$","(3,463)","","","(136)","%"]]
[[/GREPCENT_TABLE]]

Other income (expense), net increased by $3.5 million or 136%, to $0.9 million for the year ended December 31, 2023 as compared to $2.5 million for the year ended December 31, 2022. The increase was largely driven by the net impact of foreign exchange gains and losses.

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Liquidity and Capital Resources

Since its inception, the Company has incurred net losses and negative cash flows from operations. As of December 31, 2023, the Company had an accumulated deficit of $483.1 million. For the years ended December 31, 2023 and 2022, the Company incurred a net loss of $82.7 million and $53.7 million, respectively, and the Company had net cash outflows from operating activities of $60.6 million and $45.2 million, respectively. As of December 31, 2023, the Company had cash of $41.3 million and working capital (current assets less current liabilities) of $35.8 million. Additionally, total liabilities exceeded total assets at December 31, 2023 by $24.5 million. The Company expects to incur additional operating losses and negative cash flows from operating activities as it continues to expand its commercial operations and research and development programs.

On August 5, 2022, the Company completed a Merger with DPCM. The Company received gross proceeds of $49.0 million from the PIPE Investment (as defined below) and the DPCM trust account. Of the gross proceeds, $21.8 million were used to repay the Venture Loan obligations and $14.2 million were used to pay for the Company's transaction costs, including DPCM's transaction costs, associated with the Merger. On April 13, 2023 (the "Closing Date"), the Company entered into a Term Loan and Security Agreement (the "Term Loan"), by and between the Company and PSPIB Unitas Investments II Inc., ("PSPIB" or the "Lender"), a related party to the Company's largest shareholder. As further described in Note 8 - Loans payable, net, the Term Loan provides for an aggregate principal amount of $50.0 million to be made available to the Company in three tranches, subject to certain terms and conditions as defined in the Term Loan, including a financial covenant that measures the Company's revenue against certain minimum percentages of budgeted revenue per quarter. The first two tranches of the Term Loan, each amounting to $15.0 million in principal, were advanced to D-Wave on April 14, 2023 and July 13, 2023, respectively. The Lender agreed to modify certain conditions to the funding of the second tranche of the Term Loan, including delaying the delivery of a board-approved operating budget and plan for the Company’s fiscal years 2023 through 2027 to August 31, 2023 (later extended to December 31, 2023); modifying the condition that, prior to the funding of the second tranche, the Company shall have nominated an additional director that is either an employee of PSPIB or an independent director selected from PSPIB nominees to require such appointment at a later time at PSPIB’s option; and modifying notice deadline requirements for the registration or filings of intellectual property. PSPIB has also agreed to waive certain covenants under the Term Loan that the Company did not meet, including the minimum revenue financial covenant for the second and third fiscal quarters ended June 30, 2023 and September 30, 2023, respectively. The availability of the third tranche of $20.0 million was subject to the satisfaction of certain conditions, including the closing of a $25.0 million non-dilutive financing on terms reasonably acceptable to the Lender, the intellectual property valuation report submitted as a condition precedent to the second tranche remaining satisfactory to the Lender and the board-approved operating budget for 2023 through 2027 to be submitted by December 31, 2023, being satisfactory to the Lender. The Company submitted the board-approved operating budget by December 31, 2023. There can be no assurance that the Company will be able to meet the other conditions necessary to draw on the third tranche or will be able to comply with the covenants of the Term Loan, or that PSPIB will agree to waive covenants under the Term Loan in the future. As of December 31, 2023, the Company was in compliance with the covenants under the Term Loan.

In conjunction with the Merger, the Company and D-Wave Systems entered into a purchase agreement with Lincoln Park on June 16, 2022 (the "Purchase Agreement") which provides D-Wave the sole right, but not the obligation, to direct Lincoln Park to buy specified dollar amounts up to $150.0 million of D-Wave's common stock, par value $0.0001 per share through November 1, 2025. The Purchase Agreement may provide the Company and D-Wave with additional liquidity to fund the business, subject to the conditions set forth in the agreement, including volume limitations tied to periodic market prices, ownership limitations restricting Lincoln Park from owning more than 9.9% of the then total outstanding Common Shares and a floor price of $1.00 at or below which the Company may not sell to Lincoln Park any Common Shares. When the Company sells shares to Lincoln Park, Lincoln Park may resell all, some, or none of those Common Shares at any time or from time to time in its discretion. During the year ended December 31, 2023, the Company has received $63.7 million in proceeds through the issuance of 42.1 million Common Shares to Lincoln Park under the Purchase Agreement. In order for the Company to issue Common Shares under the Purchase Agreement, the Company's share price must be above the floor price of $1.00. There is no assurance that the floor price will not fall below $1.00 preventing the Company from being able to make sales to Lincoln Park in the future.

65

To the extent that sufficient capital is not obtained through the cash received in connection with the proceeds of the Term Loan or the issuance of Common Shares under the Purchase Agreement with Lincoln Park, management will be required to obtain additional capital through the issuance of debt and/or equity, or other arrangements. However, there can be no assurance that D-Wave will be able to raise additional capital when needed or under acceptable terms. The issuance of additional equity may dilute existing stockholders and newly issued shares may contain senior rights and preferences compared to the currently outstanding common stock. Any future debt may contain covenants and limit D-Wave’s ability to pay dividends or make other distributions to stockholders. If D-Wave is unable to obtain additional financing, operations will be scaled back or discontinued.

As of December 31, 2023, the Company was not in compliance with certain continued listing standards of the New York Stock Exchange ("NYSE"). On March 1, 2024, the NYSE provided D-Wave with a notification letter of recompliance based on a calculation of the Company’s average closing share price for the 30 trading days ended February 29, 2024, which reflected an average closing share price above the NYSE’s $1.00 minimum requirement. D-Wave will continue to be traded on the NYSE, subject to its continued compliance with all applicable listing standards.

If the Company is unable to maintain compliance with the continued listing standards of the NYSE and is not able to cure any violations within the time periods allotted by the NYSE, if any, it will result in the delisting of the Company’s common stock from the NYSE, which could negatively impact the trading price, trading volume and liquidity of, and have other material adverse effects on, the Company’s common stock and its ability to raise capital.

In connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standard Board’s Accounting Standards Codification (“ASC”) Topic 205-40, “Basis of Presentation—Going Concern”, management has determined that the Company's liquidity condition raises substantial doubt about the Company’s ability to continue as a going concern, which is considered to be for a period of one year from the issuance of these financial statements. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. Such adjustments could be material.

Cash Flows

The following table sets forth our cash flows for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022"],["Net cash (used in) provided by:"],["Operating Activities","$","(60,649)","","","$","(45,226)"],["Investing Activities","(630)","","","(498)"],["Financing Activities","95,636","","","43,265"],["Effect of exchange rate changes on cash and cash equivalents","(115)","","","41"],["Net (decrease) increase in cash and cash equivalents","$","34,242","","","$","(2,418)"]]
[[/GREPCENT_TABLE]]

Cash Flows Used in Operating Activities

Our cash flows from operating activities are significantly affected by the growth of our business, and are 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, accounts receivable and other current assets and liabilities.

For the year ended December 31, 2023, net cash used in operating activities was $60.6 million, an increase of $15.4 million from cash used in operating activities of $45.2 million for the year ended December 31, 2022. The change is primarily due to an increase in net loss of $29.0 million and an increase in net cash used to settle accounts payable of $6.2 million, offset by increases on noncash charges related to stock-based compensation of $12.8 million and decreases in noncash income related to the change in fair value of warrant liabilities of $5.9 million.

Cash Flows Used in Investing Activities

Net cash used in investing activities during the year ended December 31, 2023 was $0.6 million, representing additions of $0.6 million in property and equipment.

Net cash used in investing activities during the year ended December 31, 2022 was $0.5 million representing additions of $0.4 million in property and equipment and $0.1 million in software primarily related to the development of our quantum computing systems.

Cash Flows Provided by Financing Activities

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Net cash provided by financing activities during the year ended December 31, 2023 was $95.6 million, an increase of $52.4 million from cash provided by financing activities of $43.3 million for the year ended December 31, 2022. The increase a result of increased net proceeds from equity financing activities of $22.1 million and increased net proceeds from debt financing activities of $30.3 million.

Contractual Obligations and Commitments

The Company has various operating leases of real estate and equipment. See Note 9 - Leases to the accompanying consolidated financial statements for further discussion of the nature and timing of cash obligations due under these leases.

Critical Accounting Estimates

Our consolidated financial statements included in this Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States. 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 that affect the reported amounts and related disclosures for the periods presented. 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 significantly. Additionally, changes in assumptions, estimates or assessments due to unforeseen events or otherwise could have a material impact on our financial position or results of operations.

The critical accounting estimates, assumptions and judgements we believe to have the most significant impact on our audited annual consolidated financial statements are described below. See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies to the audited consolidated financial statements included elsewhere in this Form 10-K for additional information related to critical accounting estimates and significant accounting policies.

Revenue recognition

We recognize revenue from the sale of our services and products. Our contracts with customers often include multiple performance obligations. Our performance obligations are as follows:

•Subscription sales to access our QCaaS cloud platform;

•Professional services related to the development and implementation of quantum computing applications;

•Quantum computing application training;

•Application support and maintenance; and

•Printed circuit boards.

Our contracts with customers may include renewals or other options at fixed prices, which typically do not represent a significant discount. Based on our assessment of standalone selling prices, we determined that there were no significant material rights provided to our customers requiring separate recognition.

When we determine that our contracts with customers contain multiple performance obligations, for these arrangements, we allocate the transaction price based on the relative standalone selling price (“SSP”) method by comparing the SSP of each distinct performance obligation to the total value of the contract. We use the SSP for products and services sold together in a contract to determine whether there is variable consideration (e.g. discount) to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we don't sell the product or service separately, we determine the SSP by considering its overall pricing objectives and market conditions, including cost plus a reasonable margin. Significant pricing practices taken into consideration include our discounting practices, the customer demographic, price lists, our go-to-market strategy, historical and current sales and contract prices. In instances where we do not sell or price a product or service separately, we maximize the use of observable inputs by using information that may include market conditions.

Sales of future revenues

On November 20, 2020, the Company entered into an agreement with the Canada Strategic Innovation Fund ("SIF"), wherein SIF committed to providing a conditionally repayable loan to the Company in the amount of up to C$40.0 million ("the SIF Loan"). The SIF Loan is conditionally repayable according to a revenue-based formula. See Note 8 to the accompanying consolidated financial statements for additional information concerning the SIF Loan.

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The accounting treatment for the SIF Loan considers the "sale of future revenues" guidance outlined in ASC 470-10-25. The debt arising from the SIF Loan was recorded at face value and will be amortized using the effective interest method, leading to the accrual of interest expenses over the estimated term of the SIF Loan. The amortization schedule is based on projected cash flows derived from the Company's long-term revenue forecast. Subsequent changes in forecasted cash flows will be accounted for under the catch-up method, which entails adjusting the accrued interest portion of the principal balance through earnings to reflect the effective interest rate. For the year ended December 31, 2023 and 2022, the Company recognized gains related to catch-up method adjustments to the accrued interest portion of the loans payable, net balance of $2.9 million and $0.6 million, respectively. The liability is classified as non-current, as the current forecast indicates that repayments will not commence within the 12 months following the balance sheet date.

As the SIF Loan is originated through a government program, a market rate of interest is not imputed in accordance with the scope limitations of ASC 835.

Term Loan fair value option election

The Company determined that it is eligible for the fair value option election in connection with the Term Loan. The Term Loan meets the definition of a “recognized financial liability” which is an acceptable financial instrument eligible for the fair value option under ASC 825. At the date of issuance, the fair value of the Term Loan was derived from the instrument’s implied discount rate at inception. The fair value option election was made to enhance the relevance and transparency of information presented related the features embedded in the Term Loan.

Changes in the fair value of the Term Loan, other than changes associated with the Company's own credit risk, are recorded as gains or losses in the Company’s consolidated statements of operations and comprehensive loss in each reporting period. Changes in fair value attributable to the Company's own credit risk are recorded in other comprehensive income or loss in the Company's consolidated statements of operations and comprehensive loss in each reporting period; there have been no such changes for the year ended December 31, 2023. Under the fair value option, debt issuance costs are recorded in other expense in the Company’s consolidated statements of operations and comprehensive loss.

The Term Loan is subject to certain repayment and prepayment provisions which the Company has considered in their valuation analysis. The valuation analysis performed as of the issuance date on April 13, 2023 and December 31, 2023 did not consider any amendments to the Term Loan that occurred subsequent to December 31, 2023 (See Note 8). To estimate the fair value of the Term Loan under the optional prepayment scenario, we have utilized the binomial lattice model. Additionally, we have employed a Monte Carlo simulation model to forecast both the probability for an event of default in the valuation analysis which would result in a mandatory prepayment of the outstanding principal and accrued and unpaid interest and the probability of the issuance of Common Shares under the Purchase Agreement to determine the estimated proceeds to be paid to the Lender along with a mandatory prepayment premium of 10%.

Recently Issued and Adopted Accounting Standards

A discussion of recent accounting pronouncements is included in Note 2 to our audited consolidated financial statements included elsewhere in this Form 10-K.

JOBS Act Accounting Election

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, as an emerging growth company we can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period and, as a result, we will not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. In addition, as an emerging growth company, we may take advantage of certain reduced disclosure and other requirements that are otherwise applicable generally to public companies. D-Wave Quantum will take advantage of these exemptions until such time that it is no longer an emerging growth company. D-Wave Quantum will cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement; (ii) the last day of the fiscal year in which its total annual gross revenue is equal to or more than $1.235 billion; (iii) the date on which it has issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which it is deemed to be a large accelerated filer under the rules of the SEC.