What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-03-30 · 85 added, 120 removed, 156 unchanged (57% of the section changed)

12 unchanged sentences

prior to the consummation of the Business Combination and IonQ, Inc.

and its wholly owned subsidiary, IonQ Quantum, Inc., after the consummation of the Business Combination.

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.

1 unchanged sentence

We believe that our proprietary technology, our architecture, and the technology exclusively available to us through license agreements will offer us advantages both in terms of research and development, as well as the commercial value of our intended product offerings.

Today, we sell access to several quantum computers of various qubit capacities and are in the process of researching and developing technologies for quantum computers with increasing computational capabilities.

We currently make access to our quantum computers available via three major cloud platforms, AWS’s Amazon Braket, Microsoft’s Azure Quantum and Google’s Cloud Marketplace, and also to select customers via our own cloud service.

This cloud-based approach enables the broad availability of QCaaS.

Today, we sell specialized quantum computing 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 QCaaS offering with professional services focused on assisting our customers in applying quantum computing to their businesses.

6 unchanged sentences

We expect to continue to incur significant losses for the foreseeable future as we prioritize reaching the technical milestones necessary to achieve an increasingly higher number of stable qubits and higher levels of fidelity than presently exists—prerequisites for quantum computing to reach broad quantum advantage.

The Merger Agreement and Public Company Costs

The Merger Agreement

On March 7, 2021, Legacy IonQ, dMY and Ion Trap Acquisition Inc.

1 unchanged sentence

Pursuant to the Merger Agreement, at the closing, the Merger Sub was merged with and into Legacy IonQ, with Legacy IonQ continuing as the surviving corporation following the merger, being a wholly owned subsidiary of dMY and the separate corporate existence of the Merger Sub ceased (the “Business Combination”).

Commensurate with the Business Combination, dMY changed its name to IonQ, Inc.

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 will be disclosed in the registrant’s future periodic reports filed with the SEC.

While the legal acquirer in the Merger Agreement is dMY, for financial accounting and reporting purposes under accounting principles generally accepted in the United States of America (“U.S.

GAAP”), Legacy IonQ is the accounting acquirer and the merger is accounted for as a “reverse recapitalization” (i.e., a capital transaction involving the issuance of stock by dMY for the stock of Legacy IonQ).

A reverse recapitalization does not result in a new basis of accounting, and the financial statements of the Company represent the continuation of the financial statements of Legacy IonQ in many respects.

Under this method of accounting, dMY is treated as the “acquired” company for financial reporting purposes.

As a result of the Business Combination, Legacy IonQ is the successor to an SEC registrant and is listed on the NYSE, which will require IonQ to continue to hire additional personnel as it continues to implement procedures and processes to address public company regulatory requirements and customary practices.

As a public company, we have incurred and expect to continue to incur, expenses for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.

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

The recent trends towards rising inflation may also materially adversely affect our business and corresponding financial position and cash flows.

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.

Rising interest and inflation rates also present a recent challenge impacting the U.S.

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 near future (especially if inflation rates continue to rise) on our operating costs, including our labor, due to supply chain constraints, consequences associated with COVID-19 and the Russia-Ukraine war, and employee availability and wage increases, which may result in additional stress on our working capital resources.

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, 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

We have generated limited revenues since our inception.

We derive revenue from providing access to quantum-computing-as-a-service (“QCaaS”), consulting services related to co-developing algorithms on our quantum computing systems, and from contracts associated with the design, development, and construction of specialized quantum computing systems together with related services.

We derive revenue from contracts associated with the design, development, construction and sale of specialized quantum computing hardware together with related services, from contracts providing access to QCaaS, and from consulting services related to co-developing algorithms on our 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.

We have determined that our QCaaS contracts represent a combined, stand-ready performance obligation to provide access to our quantum computing systems together with related maintenance and support.

The transaction price generally includes a variable fee based on usage of our quantum computing systems and may include a fixed fee for a minimum volume of usage to be made available over a defined period of access.

Fixed fee arrangements may also include a variable component whereby customers pay an amount for usage over contractual minimums contained in the contracts.

We have determined that contracts that contain consulting

services related to co-developing quantum computing algorithms and the ability to use our quantum computing systems to run such algorithms represent a combined performance obligation that is satisfied over-time with revenue recognized based on the efforts incurred to date relative to the total expected effort.

Certain of our contracts contain multiple performance obligations, most commonly in contracts for specialized quantum computing systems together with related maintenance and support.

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.

2 unchanged sentences

We determine standalone selling price based on the observable price of a product or service when we sell the products or services separately in similar circumstances and to similar customers.

When the standalone selling price is not known, due to it being either highly variable or uncertain, we allocate the transaction price using the residual approach.

For contracts with a fixed transaction price, the fixed fee is recognized on a straight-line basis over the access period or associated measure of progress for our consulting services contracts.

For contracts without fixed fees, variable usage fees are billed and recognized during the period of such usage.

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.

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.

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.

Revenue is recognized on performance obligations satisfied over time based on the efforts incurred to date relative to the total expected effort.

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.

For performance obligations related to providing QCaaS access, fixed fees are recognized on a straight-line basis over the access period.

We are currently focused on marketing our QCaaS and consulting services and have entered into, and are continuing to enter into, new contracts with customers.

3 unchanged sentences

Cost of revenue primarily consists of expenses related to delivering our services, including personnel-related expenses, allocated facility and other costs for customer facing functions, and costs associated with maintaining our in-service quantum computing systems to ensure proper calibration as well as costs incurred for maintaining the cloud on which the QCaaS resides.

Cost of revenue also includes hardware costs for construction of specialized quantum computing hardware.

Personnel-related expenses include salaries, benefits, and stock-based compensation.

5 unchanged sentences

Sales and marketing

Sales and marketing expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, costs for direct advertising, marketing and promotional expenditures and allocated facility and other costs for our sales and marketing functions.

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 facility and other costs for our sales and marketing functions.

We expect to continue to make the necessary sales and marketing investments to enable us to increase our market penetration and expand our customer base.

1 unchanged sentence

General and administrative expenses consist of personnel-related expenses, including salaries, benefits and stock-based compensation, and allocated facility and other costs for our corporate, executive, finance, and other administrative functions.

General and administrative expenses also include expenses for outside professional services, including legal, auditing and accounting services, recruitment expenses, information technology, travel expenses and certain non-income taxes, insurance, and other administrative expenses.

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 headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, NYSE, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.

1 unchanged sentence

Depreciation and amortization

Depreciation and amortization expense results from depreciation and amortization of our property and equipment, including our quantum computing systems, and intangible assets that is recognized over their estimated lives.

Nonoperating Costs and Expenses

Change in fair value of warrant liabilities

The change in fair value of warrant liabilities consists of mark-to-market fair value adjustments recorded associated with the public and private placement warrants assumed as part of the Business Combination.

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.

Offering costs associated with warrants

Offering costs associated with warrants consist of transaction costs that have been allocated to the public and private warrants and were expensed upon consummation of the Business Combination on September 30, 2021, based on the relative fair value of the equity issued and the liability-classified warrants.

Other income (expense), net

Other income (expense), net consists of realized losses on our available-for-sale investments and certain other expenses.

Other income (expense), net consists of gains and losses that arise from fluctuations in foreign currency exchange rates, realized losses on our available-for-sale investments, 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.

Results of Operations

The following table sets forth our statements of operations for the periods indicated:

The following table sets forth our consolidated statements of operations for the periods indicated:

(in thousands)

7 unchanged sentences

Loss from operations

Change in fair value of warrant liabilities

Gain (loss) on change in fair value of warrant liabilities

Interest income, net

Offering costs associated with warrants

Other income (expense), net

Loss before benefit for income taxes

Benefit for income taxes

Loss before income tax expense

Income tax benefit (expense)

(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:

7 unchanged sentences

Revenue increased by $10.9 million, or 98%, to $22.0 million for the year ended December 31, 2023, from $11.1 million for the year ended December 31, 2022.

The increase was primarily driven by new revenue contracts under which we provided services during the year ended December 31, 2022, an increase in revenue from our cloud service providers and an increase in revenue from services provided under our contract with UMD, as well as other existing contracts.

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, 2023.

Cost of revenue

2 unchanged sentences

Cost of revenue increased by $5.2 million, or 175%, to $8.1 million for the year ended December 31, 2023, from $2.9 million for the year ended December 31, 2022.

The increase was driven primarily by the increase in costs to service contracts for the year ended December 31, 2022, including an increase in labor costs to service consulting arrangements.

The increase was driven primarily by the increase in labor costs to service contracts, as well as the increase in materials costs for arrangements to build specialized quantum computing hardware, for the year ended December 31, 2023.

Research and development

2 unchanged sentences

Research and development expense increased by $48.3 million, or 110%, to $92.3 million for the year ended December 31, 2023, from $44.0 million for the year ended December 31, 2022.

The increase was primarily driven by an $18.1 million increase in payroll-related expenses, including stock-based compensation of $10.6 million, as a result of increased headcount, a $2.6 million increase in materials, supplies and equipment costs, and a $2.3 million increase in professional service costs to support research and development initiatives.

The increase was primarily driven by a $44.0 million increase in payroll-related expenses, including an increase in stock-based compensation of $27.1 million, as a result of increased headcount, and a $1.8 million increase in materials, supplies and equipment costs.

Sales and marketing

7 unchanged sentences

General and administrative expenses increased by $14.8 million, or 41%, to $50.7 million for the year ended December 31, 2023, from $36.0 million for the year ended December 31, 2022.

The increase was primarily driven by an increase of $14.9 million in payroll-related expenses, including an increase in stock-based compensation of $11.0 million, due to increased headcount, and an increase of $3.4 million in director and

officer liability insurance costs.

The remaining increase is primarily due to additional transition costs incurred to operate as a public company and other general and administrative activities as a result of hiring additional personnel.

The increase was primarily driven by an increase of $10.3 million in payroll-related expenses, including an increase in stock-based compensation of $6.5 million, due to increased headcount, offset by a decrease of $2.2 million in one-time stock-based compensation costs incurred in the year ended December 31, 2022.

The remaining increase is primarily due to an increase of $4.9 million in professional services fees as we scale our business as a public company.

Depreciation and amortization

2 unchanged sentences

Depreciation and amortization expenses increased by $4.8 million, or 85%, to $10.4 million for the year ended December 31, 2023, from $5.6 million for the year ended December 31, 2022.

The increase was primarily driven by an increase of $0.7 million due to amortization of capitalized internally developed software and an increase of $1.3 million in depreciation expense associated with capitalized quantum computing system costs, as well as an increase of $1.0 million in depreciation expenses associated with other property and equipment.

Change in fair value of warrant liabilities

The increase was primarily driven by an increase of $2.3 million and $0.9 million in depreciation expense associated with capitalized quantum computing system costs and other property and equipment, respectively, and an increase of $1.4 million due to amortization of capitalized internally developed software.

Gain (loss) on change in fair value of warrant liabilities

(in thousands)

Change in fair value of warrant liabilities

The change in fair value of warrant liabilities increased by $93.5 million, or 148%, to a gain of $30.1 million for the year ended December 31, 2022, from a loss of $63.3 million for the year ended December 31, 2021.

The increase was primarily due to mark-to-market income adjustments recorded for the public and private warrants assumed as part of the Business Combination.

Gain (loss) on change in fair value of warrant liabilities

The gain (loss) on change in fair value of warrant liabilities decreased by $49.3 million, or 164%, to a loss of $19.2 million for the year ended December 31, 2023, from a gain of $30.1 million for the year ended December 31, 2022.

The decrease was due to mark-to-market adjustments based on changes in the trading price for our public warrants.

Interest income, net

1 unchanged sentence

Interest income, net

NM-Not meaningful

Interest income, net increased by $7.0 million to $7.1 million for the year ended December 31, 2022, from $0.1 million for the year ended December 31, 2021.

The increase was primarily driven by interest income earned on our cash equivalents and available-for-sale investments from the investment of the proceeds from the Business Combination.

Offering costs associated with warrants

(in thousands)

Offering costs associated with warrants

Offering costs associated with warrants decreased by $4.3 million, or 100%, to zero for the year ended December 31, 2022, from $4.3 million for the year ended December 31, 2021.

In connection with the Business Combination, $4.3 million of transaction costs were allocated and expensed related to the liability-classified public and private warrants.

Interest income, net increased by $12.2 million, or 172%, to $19.3 million for the year ended December 31, 2023, from $7.1 million for the year ended December 31, 2022.

The increase was primarily driven by interest income earned on our cash equivalents and available-for-sale investments due to higher interest rates.

Liquidity and Capital Resources

As of December 31, 2023, we had cash, cash equivalents and available-for-sale securities of $455.9 million.

Excluded from our available liquidity is $2.0 million of restricted cash, which is recorded in other noncurrent assets in our consolidated balance sheets.

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, 2023, will be sufficient to meet our working capital and capital expenditure needs for the next 12 months.

8 unchanged sentences

We may, in the future, enter into arrangements to acquire or invest in complementary businesses, services, and technologies, which may require us to seek additional equity or debt financing.

Upon the closing of the Business Combination, we received approximately $636.0 million of gross proceeds.

The proceeds are invested in money market funds, commercial paper, corporate and municipal notes and bonds, and other U.S.

government and agency securities as disclosed in Note 4 in our consolidated financial statements.

We expect to use these investments to fund our strategic operations.

Our primary uses of cash and investments are to fund our operations as we continue to grow our business.

2 unchanged sentences

However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all.

Rising interest and inflation rates present a recent challenge impacting the U.S.

High interest and inflation rates present a recent challenge impacting the U.S.

economy and could make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the future.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders.

Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends.

Debt financing and equity financing, if available, may involve agreements that

include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends.

If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our quantum computing technology on terms that may not be favorable to us and/or may reduce the value of our common stock.

1 unchanged sentence

Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors.”

Other than operating expenses and our continued investment in our quantum computers, cash requirements for fiscal year 2023 are expected to consist primarily of capital expenditures for corporate facilities.

Our material cash requirements as of December 31, 2022, include operating lease commitments, including the lease of our headquarters in College Park, Maryland and manufacturing and office space in Bothell, Washington.

Other than operating expenses and our continued investment in our quantum computers, cash requirements for fiscal year 2024 are expected to consist primarily of capital expenditures for facilities.

Our material cash requirements as of December 31, 2023, include operating lease commitments, including the lease of our headquarters in College Park, Maryland and our manufacturing, research and development and general office space in Bothell, Washington.

As of December 31, 2023, we have total operating lease obligations of $19.8 million, with $1.9 million payable within 12 months.

1 unchanged sentence

(in thousands)

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Cash flows from operating activities

1 unchanged sentence

Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities.

Net cash used in operating activities during year ended December 31, 2022, was $44.7 million, resulting primarily from a net loss of $48.5 million, adjusted for non-cash activity, primarily related to the gain recorded as a result of mark-to-market activity for our public warrants offset by stock-based compensation and other working capital activities.

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.

The increase in net cash used in operations from the prior year period was primarily related to increased research and development activities, increased compensation costs as a result of hiring personnel and increased costs incurred as a public company.

Net cash used in operating activities during the year ended December 31, 2021, was $26.5 million, resulting primarily from a net loss of $106.2 million, adjusted for non-cash activity, primarily related to the loss recorded as a result of mark-to-market activity for our public and private warrants, stock-based compensation and offering costs associated with warrants, as well as other working capital activities.

Net cash used in operating activities during the year ended December 31, 2022, was $44.7 million, resulting primarily from a net loss of $48.5 million, adjusted for non-cash activity, primarily related to the gain recorded as a result of mark-to-market activity for our public warrants offset by stock-based compensation and other working capital activities.

Cash flows from investing activities

Net cash used in investing activities during the year ended December 31, 2022, was $309.1 million, primarily resulting from purchases of available-for-sale securities of $605.7 million, additions of $9.3 million to property and equipment primarily related to the development of our quantum computing systems, offset by cash received from sales and maturities of available-for-sale investments of $310.0 million.

Net cash used in investing activities during the year ended December 31, 2021, was $213.8 million, primarily resulting from purchases of available-for-sale securities of $203.8 million, additions of $7.8 million to property and equipment primarily related to the development of our quantum computing systems, $1.6 million of capitalized internal software development costs, and $0.6 million of intangible asset acquisition costs.

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 investments 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.

Net cash used in investing activities during the year ended December 31, 2022, was $309.1 million, primarily resulting from purchases of available-for-sale securities of $605.7 million and additions of $9.3 million to property and equipment primarily related to the development of our quantum computing systems, offset by cash received from maturities of available-for-sale investments of $310.0 million.

Cash flows from financing activities

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.

Net cash provided by financing activities during the year ended December 31, 2021, was $603.2 million primarily reflecting proceeds received from the Business Combination, including the PIPE investment, as well as cash received from the exercise of warrants and exercise of stock options.

Net cash provided by financing activities during the year ended December 31, 2022, was $1.1 million, primarily resulting from proceeds from stock options exercised.

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.

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities.

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.

7 unchanged sentences

Revenue recognition

We derive revenue from our QCaaS arrangements, consulting services related to co-developing algorithms on our quantum computing systems, and from contracts associated with the design, development, and construction of specialized quantum computing systems together with related services.

We have applied judgment in determining that our QCaaS contracts represent a combined, stand-ready performance obligation to provide access to our quantum computing systems together with related maintenance and support.

For arrangements with multiple performance obligations, judgment is used to determine whether multiple services in the contract should be accounted for separately or as a group.

Judgment is also applied when determining the relative standalone selling price of each performance obligation, including determining when to apply the residual method, as this is used to allocate the transaction price to each performance obligation within the contract.

We derive revenue from contracts associated with the design, development, and construction of specialized quantum computing hardware together with related services, from contracts providing access to QCaaS, and from consulting services related to co-developing algorithms on the 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.

When the standalone selling price is not known, due to it being either highly variable or uncertain, we allocate the transaction price using the residual approach.

In addition, we apply judgment in evaluating any consideration payable to the customer and whether it is in exchange for distinct goods or services or should be reflected as a reduction of revenue.

For arrangements where we enter into multiple contracts with a single counterparty at or near the same time, we use judgment in determining whether the contracts should be combined and whether we should account for them as a single contract.

We account for them as a single contract when one or more of the following criteria are met:

(i) the contracts are negotiated as a package with a single commercial objective;

(ii) consideration to be paid in one contract depends on the price or performance of the other contract;

and (iii) goods or services promised are a single performance obligation.

Certain products and services have limited or no history of being sold on a standalone basis, requiring us to estimate the standalone selling price.

In addition, we take into consideration the estimated costs to be incurred to satisfy the performance obligation plus an appropriate profit margin.

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.

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 sheet.

Prior to 2019, we built certain quantum computing systems solely for research and development purposes and these quantum computing systems were deemed to have no alternative future use.

In 2019, we began to commercialize our quantum computing systems via the offering of QCaaS and quantum computing systems built thereafter were determined to provide a probable future economic benefit.

As a result, hardware and labor costs associated with the building of such quantum computing systems were capitalized in the period the costs were incurred.

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.

Judgment is used to determine when hardware and labor costs incurred for our quantum computing systems should be capitalized as a result of our assessment of whether the system will provide a probable future economic benefit and whether or not the costs represent activities necessary to build the systems, maintain the systems or to perform certain research and development functions.

Judgment is also used to determine when the systems are placed into service and the estimated useful life of the associated systems.

Changes in these estimates can have a significant impact on the assessment of capitalized costs, which could result in material changes to reported property and equipment, net.

The amount of depreciation expense associated with the quantum computing systems may also vary based on the estimated useful life.

Capitalized internally developed software

Capitalized internally developed software, which is included in intangible assets, net, on the consolidated balance sheet, consists of costs to purchase and develop internal-use software, which we use to provide services to our customers.

Judgment is used to determine when costs to develop internal-use software for a specific project should be capitalized and whether or not the costs represent activities necessary to enhance the functionality of the software or maintain the performance of the software, and whether it is considered probable that the software will be used to perform the function intended.

Judgment is also used to determine when the software is available for use as well as the estimated useful life of the software.

The assumptions used to capitalize internally developed software costs consider when the preliminary project stage is completed, whether the software will perform the function intended, and whether the development activities enhance the functionality of the software or maintain the performance of the software.

Changes in these estimates can have a significant impact on the assessment of capitalized costs, which could result in material changes to reported intangible assets, net.

The amortization of capitalized internally developed software may also be impacted by the estimated useful life associated with these intangible assets.

Impairment of long-lived assets

Long-lived assets, such as our quantum computing systems and capitalized internally developed software, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

As of December 31, 2022, we did not have an impairment of any long-lived assets.

In determining whether a potential impairment exists, judgment is used in determining the level at which the assessment is made.

We have determined that the company consists of one entity-wide asset group for purposes of assessing whether a triggering event has occurred that would indicate the long-lived asset group’s carrying value is not recoverable.

Impairment calculations, if necessary, contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values.

Key assumptions used in estimating future cash flows and asset fair values include projected revenue growth and operating expenses, as well as forecasting asset useful lives and selecting an appropriate discount rate with respect to any terminal value cash flows.

Triggering events occur when there are indicators that the carrying value of a long-lived asset may not be recoverable.

These indicators may include internal and external economic factors, including significant decrease in market price of our capital stock, adverse market conditions, and an adverse change in the manner of which the asset is used.

The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections consistent with our operating strategy including the pace of technological change or specific technological challenges in building our quantum computing systems.

Changes in these estimates can have a significant impact on the assessment of fair value, which could result in material impairment losses.

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, the Company considers, 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.

Emerging Growth Company Status and Smaller Reporting Company Status

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards.

The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.

During the extended transition period, it may be difficult or impossible to compare our financial results with the financial results of another public company that complies with public company effective dates for accounting standard updates because of the potential differences in accounting standards used.

We will remain an emerging growth company under the JOBS Act until the earliest of (a) December 31, 2025, (b) the last date of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (c) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three-year period.

We are also a smaller reporting company as defined in the Exchange Act.

We may continue to be a smaller reporting company even after we are no longer an emerging growth company.

We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

Under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies.

As a result of the market value of the Company's common stock held by non-affiliates as of June 30, 2023, exceeding $700.0 million, we became a large accelerated filer under the Exchange Act as of December 31, 2023, and no longer qualify as an emerging growth company.

Therefore, we are required to comply with new or revised accounting standards as of the effective dates applicable to public companies that are not emerging growth companies.

We were also a smaller reporting company as defined in the Exchange Act until June 30, 2023.

However, we may continue to use the scaled disclosures permitted for a smaller reporting company through this Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and must begin providing non-scaled larger company disclosure in our first quarterly report in our next fiscal year (i.e., the quarterly report for the three-month period ended March 31, 2024).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis