Quantum computing firm D-Wave faces funding shortfall, investors say

Some investors are warning that D-Wave, one of Canada's boldest and most controversial technology companies, is facing a shortage of funds six months after going public, according to a report in Canada's The Globe and Mail.

 

Daniel Wolfe, president of Montclair, N.J.-based 180 Degree Capital, which holds 91,938 shares of D-Wave stock, said they (D-Wave) need a strategy to prove they can pay their bills and how they will survive and create shareholder value, and that the company has liquidity problems.

 

D-Wave, based in Burnaby, British Columbia, Canada, has raised more than $350 million from investors. It has also received tens of millions of Canadian dollars in federal aid and features prominently in the government's quantum strategy.

 

D-Wave's quantum computing chip

 

D-Wave has spent 24 years developing machines that derive their computing power from the quantum effects of subatomic particles, and it promises that one day they will surpass the world's most powerful computers.

 

The company's technology was advanced enough that D-Wave generated millions in revenue, delivering results that 63 customers, including Mastercard, Deloitte and Canadian grocer Save-On-Foods, were willing to pay for - solving complex optimization problems such as scheduling workers and starting loyalty programs.

 

Rival quantum computers have not been able to do this for years. CEO Alan Baratz said at a D-Wave conference last month, "The era of commercial quantum computing has arrived, and D-Wave is leading the way."

 

But D-Wave is still in the early stages of building its business, and its technology has yet to reach its full potential. It will take several years and more investment. In the meantime, competitors are building machines that may exceed D-Wave's capabilities.

 

The company's plight is a reminder that translating breakthrough technology into commercial success is rare. It needs to translate scientific advances into practical products, create demand from paying customers, and raise enough money from patient investors. Falling behind is a constant threat.

 

For D-Wave, mastering quantum mechanics may be the easiest part.

 

How to break the ice?

 

To secure its future, D-Wave tried to raise $340 million last year through a merger with New York Stock Exchange-listed special-purpose acquisition firm DPCM Capital Inc. But with tech stocks out of favor, D-Wave raised only a fraction of that amount. Its shares have fallen 84 percent since the merger last August.

 

Geordie Rose, founder of D-Wave Systems Inc . founder of D-Wave Systems Inc.

 

Now, when the lockup period lifts on Sunday, owners of D-Wave equity, which dates back to when it was privately held, will get their first chance to sell. That includes Amazon founder Jeff Bezos, Goldman Sachs, the venture capital arm of the U.S. Central Intelligence Agency, Fidelity Investments, Japan's NEC Corp. and majority shareholder Montreal's Public Sector Pension Investment Board (PSP), which has invested more than $120 million in D-Wave.

 

The actions of existing shareholders could affect D-Wave's fragile cash position. on September 30, 2022, D-Wave had $13.8 million in cash. It generated $4.8 million in revenue in the first nine months of 2022 and had operating expenses of $40.9 million. d-Wave said revenue for the fourth quarter will be $4.2 million or less.

 

D-Wave expects sales to grow rapidly, reaching $550 million in 2026. However, achieving that goal will be costly, with cash flow projected at a heavy loss of -$139 million in 2023 and 2024.

 

The company's main source of funding is an equity line of credit from Chicago's Lincoln Park Capital Fund. It allowed D-Wave to raise up to $150 million in a stock offering. But there was still a price to pay: D-Wave paid a $2.6 million commitment fee in October and issued stock to Lincoln Park at a below-market price.

 

But D-Wave will only receive a limited amount of cash per day, and Linkin Park cannot own more than 9.9 percent of the company, which has seen its market value drop to $176 million. At current price levels, that would cap Linkin Park's holdings at $17.4 million.

 

There is one more hurdle: If the share price falls below $1 per share, D-Wave will be barred from using its line of credit. Shares closed at $1.58 on Friday. It's unclear how many unlocked investors might sell their shares or what effect that would have on the stock. Those holding millions of shares paid 2 cents or less per share and could make a profit even if they sold now.

 

Michael Brown, a former director of D-Wave who holds 70,866 shares, said, "Some people will be flocking away, and who knows what will happen to the price then." Chen Fong, a Calgary-based angel investor who holds 68,503 shares, said, "I'll probably sell and take a loss."

 

Richard Shannon, an analyst at Craig-Hallum Capital in Minneapolis, said, "They need to improve their balance sheet significantly in the near future." D-Wave warned that it could scale back operations or cease operations if it can't find new financing.

 

Responding to questions about liquidity and support for its financial efforts, Baratz said in an e-mailed statement that D-Wave is exploring "additional financing while continuing to focus on growth. But until D-Wave generates significant revenue, it hopes to meet their cash needs through public and/or private equity offerings (including its line of credit) and/or debt financing or other sources of capital (including strategic partnerships)."

 

Infinity Machine

 

Despite its funding difficulties, D-Wave is an early commercial leader in the quantum computing race, including Google, IBM and Xanadu Canada. They are all building the first machines with better-than-supercomputer performance.

 

Early theorists believed it would take decades to build such a computer, which instead of reading ones or zeros, would take advantage of the quantum mechanical properties of subatomic particles that can be in multiple states at once.

 

But Geordie Rose, co-founder of D-Wave, embraced the emerging theory and began building a machine using a process known as quantum annealing. He argued that D-Wave could bring to market faster a more limited but more practical machine that could perform optimization tasks such as financial modeling and materials simulation.

 

The approach is controversial; the scientific community is skeptical that D-Wave's machine is a quantum computer. But it has attracted investors and hot debate. A Time magazine cover story called Rose's computer "the Infinity Machine.

 

D-Wave's original plan was to sell expensive and complex machines: they required months of installation to meet specific operating conditions, allowing its semiconductors to operate in temperatures colder than deep space.

 

But buyers were few; the early machines had limited use and could only offer scientists at well-funded research institutions, including NASA, Google, Lockheed Martin and the U.S. Los Alamos National Laboratory, a chance to tinker with cutting-edge technology.

 

PSP got involved after portfolio manager Philippe St-Jean, who holds a Ph.D. in physics, became interested in D-Wave. in 2014, PSP invested C$25 million in the company, a rare direct transaction, and has since become D-Wave's largest investor. "We are long-term investors, so we have to think about important technologies for the future. For example 15 to 20 years from now," St-Jean, who has left PSP, told the Globe and Mail in 2018.

 

Meanwhile, the future of the industry shifted to the cloud. 2017 saw D-Wave hire Baratz as chief product officer. The Silicon Valley veteran had led Sun Microsystems Inc. in the 1990s to transform Java from an emerging programming language into the Internet's primary software-writing platform.

 

Under his guidance, D-Wave delivered online technology by creating software and development tools. after Baratz was promoted to CEO in 2020, he told employees to focus on cloud deals and stop selling whole machines.

 

The D-Wave Advantage

 

Despite this, D-Wave is still struggling to raise capital, and in late 2018, as it was on the verge of securing a major commitment from Chinese Internet giant Alibaba, the "Meng Wanzhou incident" occurred in Canada. Alibaba pulled out.

 

Existing investors injected $30 million to help D-Wave weather the storm. It then raised $40 million in 2020 from PSP, BDC Capital, Goldman Sachs and newly minted NEC. The deal reduced its valuation from $450 million to less than $170 million. Most of the shares held by other investors were sold off.

 

Baratz believes an IPO would address D-Wave's cash needs. He said last year that a merger with a special purpose acquisition company (SPAC) was the best option for a promising company in an emerging industry. Two other quantum computer companies recently made SPAC initial public offerings, including IonQ, which raised more than $600 million.

 

SPAC is controversial for several reasons, including the fact that investors in "blank check" note entities can redeem their shares prior to the merger. 40 million. With $340 million, it can fund itself for many years.

 

As the process unfolds, redemptions from other SPACs are climbing. As of June, Baratz wanted a Lincoln Park line of credit as a backup, but DPCM CEO Emil Michael was concerned that the threat of dilution would increase SPAC redemptions, regulatory filings show. As a result, they redrafted an agreement in which D-Wave agreed to lower the minimum financing requirement from $115 million to $30 million.

 

By the close of the deal in August 2022, 97% of DPCM shareholders redeemed their shares, leaving only $9 million for D-Wave - which was less than the $11.5 million in transaction costs for the merger. more than half of the $40 million raised by D-Wave was used to repay the venture loan.

 

D-Wave's financing plan failed and it now has the additional cost of operating a public company, Brown said, adding that the SPAC transaction "did not solve their financial problems.

 

The company's future remains unclear. Can it find funding at a time when investors are hesitant to back unprofitable technology companies? Will it cut costs like other tech companies, and will PSP invest further? (A spokeswoman for PSP declined to comment.)

 

D-Wave has a lot of technology and 200 patents, and "I think someone will take them out," Fong said.

Selling D-Wave could present a dilemma for the government, which has supported Canada's quantum industry as part of its innovation agenda. The government has been criticized for doing little to help build a homegrown tech giant. d-Wave could be challenged, but it is the most commercially advanced quantum company in Canada.

 

If the government doesn't approve the deal, it could block a foreign takeover and have the power to repay a C$40 million grant to D-Wave in 2020 immediately after a change of control. But would it do so if such a move threatened D-Wave's very existence?

 

Brown said D-Wave's woes "will inevitably have a serious impact on a 24-year-old startup that has raised a lot of money and hasn't done much".

 

Reference link:

https://www.theglobeandmail.com/business/article-d-wave-infinity-machine-cash-crunch/