The First Case of Financial Fraud in Quantum Corporation
Rigetti Computing, a publicly traded quantum computing company, was scheduled to report third-quarter earnings on Monday afternoon, Nov. 14, but ahead of the company's third-quarter earnings call, Rigetti issued a statement saying it would not discuss the earnings report.
The delay is just the beginning of a "surprise" for the company, which has requested an extension to file its third-quarter and 10-Q statements for the nine-month period ended Sept. 30. In the same statement, Rigetti also plans to eventually restate earnings for the previous quarters ended March 31 and June 30 of this year.
In addition, the company found that $1.6 million of the operating expenses related to "electric utility charges" at the Berkeley, California, plant were unknown and never paid since 2019.
In preparing the financial statements for the third quarter of 2022, management evaluated the valuation assumptions used to estimate the fair value of these shares using a Monte Carlo simulation model and determined that the volatility assumptions used in the valuation should be modified to include a greater weighting of the volatility of the Company's public warrant trading prices and that such greater weighting should be included in the preparation of the financial statements for the first and second quarters of 2022.
Accordingly, the Company has determined that restatements are required to be made to its financial statements for the quarters ended March 31, 2022 and June 30, 2022, and the Company intends to prepare and file a Form 10-Q/A with the SEC for each such period.In addition, the Company is completing its analysis of the treatment of additional operating expenses, which are estimated to total approximately $1.6 million, related to the period since 2019 Electric utility charges for a portion of the electricity used at the Berkeley facility that were not paid and recognized in prior periods.
The company is evaluating the accounting for these additional operating expenses, which is expected to include recording the accrual of the additional electricity charges expected to be paid to the utility provider in the financial statements for the quarters ending March 31, 2022 and June 30, 2022, and recording the operating expenses in the financial statements for the quarter ending September 30, 2022."
Rigetti Quantum Computer
The disclosures come less than a week after it was announced that Rigetti Computing founder Chad Rigetti would be leaving the company on Dec. 15, when the company announced that the founder would be leaving his leadership role to focus on product development.
During the earnings call, Rigetti's director, Alissa Fitzgerald, said that Chad Rigetti's impending departure from the company was a "personal decision. She also said that the company is in the process of reaching an exit agreement with Chad Rigetti and that details will be made public.
She added that Rigetti Computing strongly believes that for the company to realize its potential, it needs an "experienced public company executive" to "focus on the time-consuming day-to-day demands of running a public company. Qualified candidates have been identified, she said.
Rick Danis, Rigetti's interim president and CEO, also spoke on the conference call, saying Rigetti does not plan to make any changes to its technology roadmap. He also expressed optimism about the company's continued prospects.
01Financial fraud?
The sudden and inexplicable appearance of a large "electricity bill" has led to questions about financial fraud, but of course it is up to the SEC to determine whether it is fraudulent, and there is no news yet that the SEC is involved in the investigation.
In March, Rigetti was listed on NASDAQ through a merger with Supernova Partners Acquisition Company II ltd. which is itself a high risk area for financial fraud.
Also this March, the SEC proposed a draft regulation for SPACs, with SEC Chairman Gary Janssler noting that the main goal is to curb information asymmetry, securities fraud and conflicts of interest that exist in the SPAC business, so that SPAC investors receive the same protection as traditional IPOs.
According to the 21st Century Business Herald, an international hedge fund manager noted. "Since last year, many SPAC companies have deliberately exaggerated the performance and future growth space of the acquired assets in the process of acquiring them, resulting in losses for chasers. But these exaggerated performance or fictitious financial performance of SPAC companies and the relevant underwriters have not been punished accordingly, resulting in more and more Wall Street investment institutions began to stay away from SPAC investments."
The so-called SPAC means that the institution first launches a shell company to raise capital by listing in the capital market, and then acquires a company with an actual business to achieve asset injection. Compared with the traditional IPO process, SPAC has the advantages of short operation time, low cost and simple process, and has become a shortcut for many companies to "go public". More importantly, by acquiring high-quality enterprises to complete the asset injection, the share price of SPAC companies may soar to the sky, enabling all parties to achieve a lucrative return on investment.
However, with the rapid development of the SPAC industry, various kinds of chaos have emerged one after another. First of all, more and more SPAC companies will deliberately "exaggerate" the growth space of enterprise performance when announcing the acquisition of assets, so as to raise the share price for profit. Secondly, some companies that fail to meet the traditional IPO entry threshold are listed through SPACs, which to some extent causes "inconsistency" in listing standards and leads to policy arbitrage. Thirdly, there are a lot of information asymmetry, securities fraud, transfer of benefits and other insider trading in SPAC companies from listing to asset acquisition and injection.
02What went wrong with Rigetti?
Among global quantum companies, there are some high-profile unicorns in addition to tech giants, and Rigetti was one such company before its IPO, with a valuation of $1.5 billion. But just a few months after the IPO, Rigetti's market cap shrunk to $100 million, coinciding with the announcement of founder Chad Rigetti's resignation as CEO at this juncture. So what went wrong for Rigetti, a former star company?
For starters, Rigetti seemed to relish the hype, but the end result often failed to deliver on its promises.
To be fair, Rigetti seemed like a good company with its own chip factory, its own programming language and cloud platform, but it was a "satellite" company.
In September 2018, Rigetti Computing announced plans to build a 128-quantum-bit computer based on a new chip architecture within the next 12 months. Four years later, that goal has not yet been reached. Last year, Rigetti released 40- and 80-quantum-bit chips, which is always a new progress.
But there is actually more than one such thing, for example, 2021 said to launch 1000 and 4000 quantum bit chips in 2024 and 2026 respectively, by May this year, and then postponed a year back.
Now, according to their latest roadmap, an 84-quantum-bit chip will be launched in early 2023, followed by a 336-quantum-bit processor, Lyra, later in 2023. it's not clear if Rigetti can keep its promise this time, after all, not many companies follow their roadmaps as closely as IBM.
Second, Rigetti may actually be having operational problems. When announcing the postponement of the roadmap, Rigetti explained that this expected timeline and roadmap was based on several considerations.
1) Higher than expected spending on labor, equipment and system components, and increased costs associated with system development.
2) Market and supply chain conditions that prevented the timely availability of materials needed for the company's machines.
3) The company's available working capital at the close of the business combination was lower than expected, which limited the company's ability to absorb these increased costs and time factors.
This said, it leads to another disadvantage of SPACs - high redemption rates.
When an SPAC completes an initial public offering (IPO), the proceeds are held in a trust account until the SPAC identifies a target company to merge with, usually within one to two years of the IPO. Since the SPAC has no business operations of its own and the target company is not known at the time of the IPO, investors have the opportunity to redeem their shares prior to the corporate merger for a pro rata share of the funds in the trust account. However, if a majority of shareholders choose to exercise their redemption rights, this may significantly reduce the cash proceeds available to the merged company for its future operations. If redemption rates are unusually high, SPAC may be in danger of failing to meet its minimum cash condition.
SPAC Research/SPAC Alpha data show that from January to July of last year, SPAC's average monthly redemption rate ranged from 7% to 43%. However, from July through November, that range jumped to 43%-67%, with the average SPAC redemption rate averaging about 60% during those four months.
In Rigetti's case, the funds in the Supernova trust account shrank severely from $345 million to $147.51 million between the signing of the merger agreement and the final IPO.
Finally, why did Chad Rigetti choose this juncture to resign? Is it too much of a coincidence? One foot said he was leaving, and the next the company announced financial problems.
Don't worry, let the bullets fly a little longer!
In Uncle Box's opinion, with the emergence of Rigetti as a butterfly, more problems in the industry may surface, especially for companies listed through SPAC, including IonQ, D-Wave, Arqit, etc. Perhaps looking back many years from now, the Rigetti incident will become a landmark event in the bursting of the market bubble.
Reference links：
[1]https://investors.rigetti.com/news-releases/news-release-details/rigetti-computing-files-extension-third-quarter-2022-financial
[2]https://www.insidequantumtechnology.com/news-archive/the-latest-on-rigetti-a-delayed-earnings-report-restatements-of-earlier-quarters-and-a-big-electric-bill/
[3]https://baijiahao.baidu.com/s?id=1728852640284970528&wfr=spider&for=pc
[4]https://www.reuters.com/legal/transactional/high-redemption-rates-see-spacs-relying-alternative-financing-2022-01-14/
